Do you always base your valuation of property on the current or last years NOI? Or, do you leave some room for potential/projected increase in gross income and therefore a higher NOI?
I.E. A property that is mis-managed or not marketed well w/ a high vacancy rate
Newbie here just learning.
Ideally you value the project on what it’s doing today.
The projections just reveal the profit potential. That is, the profits you make after you’ve invested your time, spent your money, and applied your talents to improving the management, the marketability, and the efficiency of a given project.
Most sellers want YOUR cake and eat it, too, by selling at a price that reflects the potential value.
You should only pay for what the property is doing today, not tomorrow.
The operating (negotiating) assumption here is that the property will continue doing exactly what’s it doing now, and nothing more.
If the seller wants more than what the project is worth, based on the current numbers, the seller can go ahead and close the gap by investing more of his own time, money, and talents to make the project worth more.
Otherwise, no investor works for free.
I could say more, but hopefully that’s enough.
Makes sense.
Thx for the input.
Current is now, Potential is speculative.
Example…Currently I ain’t broke.
Potentially…I could be a millionaire…but…I’d have to take the ex back.
Rule of thumb is, buy on actuals.
Having said that, potential certainly is a factor. For example, if a property’s rents are 30% under market rent because the previous owner has been “lazy” and you have a strong business plan to increase rents, then you might consider relaxing your usual rules at buying at a 10 cap. Maybe you decide you’ll get in at a 7 cap because you feel confident you can achieve market rents within 12 months, when you’ll be at a 12 cap.
I find it overly simplistic sometimes to say “thou shalt only buy at a 10 cap of actuals”. While it is fantastic when we encounter a “no brainer” deal, the reality is that we as entrepreneurs frequently operate in the “gray zone”.
Michael