Property valuation

[orei]

I`m interested in seeing some people`s opinion on the following scenario:

You`re given the opportunity to put a price on a small multi-suite apartment in a private deal. The owner does not want to put a price on the building – but wants you to do it. How do you proceed, how do you (fairly) valuate the complex. Let`s see details on how you come up with your numbers.

Further details on building:

- Age: ~35yrs
- Gross Rent: 51,000 (laundry & rent) - under market rent, but this is Ontario so the tenants will need to move out to up the rent to the market rates
- 8 Suites: 2 that require a little bit of fixing up (bathroom repair and paint)
- Taxes: ~9,000
- Utilities: ~5,800
- Landscaping/Snow Removal: ~$200/month
- Insurance ~$1,800. This is an estimate … is this reasonable for a middle-aged 8 suitor?

Location is good. Not A+ but very solid (B+ if you will) in terms of rental potential. Building is located in Waterloo. There have been no issues filling vacant suites. Roof is in great condition – new in past 5 years. Structure is very solid. Building has electric heat – no boilers etc. Hot water tank is rented – included in utilities cost. Windows are all new in the past 5 years. Six of the 8 suites have upgraded flooring and bath fixtures.

Other expenses will be Property Management and repairs – go ahead and pick your favorite rule of thumb for these numbers.

What would be your offer and strategy on something like this? Please include some details on why, for the `learners` amongst us.

 

[invst4profit]

If he refuses to set a starting price for the negotiations I would offer him $100,000 or $1 it doesn`t matter.That number is based on nothing other than the fact that it is ridiculously low

If you are serious about negotiating never be first to state a price.
I would push him to sit down and figure out what he wants and come back to me when he is ready.

Sorry I can`t answer your question any other way, I don`t negotiate the way you are suggesting.
If you want to be in control of what you pay he must state a price that you can work down from.

Or is your question: How much would you pay for this property?

How much is the rental income without laundry.
Does the owner pay all utilities ?

Your rents seem very low. What is market at for your area?

 

[tahani]

I totaly agree. i think the seller is not that motivated or he is thinking lets see how much this buyer knowa and willing to pay. i will bet that what ever price you come with he will say no way as most sellers in Waterloo think that they can get way more than what properties are worth now. lots of new develpments and this seller is thinking well lets see what i can get. try anyways and see for your self.

by the way use the 10% rule to start get an idea of ball park price of homes. eg. if rent is 51, 000 dollars then home price should around 510,000 even thought in this area its more like 8 percent rule.

hope that helps you.
good luck.

tahani

 

[Thomas Beyer]

QUOTE (orei @ Dec 9 2009, 11:22 AM)
.. Gross Rent: 51,000 (laundry & rent) - under market rent, but this is Ontario so the tenants will need to move out to up the rent to the market rates

[/font]- 8 Suites: 2 that require a little bit of fixing up (bathroom repair and paint)[/font


400 to 600K depending on condition ..



Items to consider when buying an apartment building: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-14548-Buy_vs_Build.html

 

[Rickson9]

For me the value of this building is $240K to $320K. Otherwise I can find better returns elsewhere. At 8 units, this comes out to $30K to $40K per door which is similar to what my friend recently paid for his 10 unit apartment in Midland, Ontario. It cashflows very well. Personally I would never pay 10x gross for anything, but I am only speaking for myself.

 

[vandriani]

I cannot recommend a price but....

I`d do the most that I can do to find out the market value and then offer an extremely low price. Tell the seller that if he/she is serious about selling, to call you and state a price. I`m guess that he/she has a price in mind but is trying to find an unknowledgable buyer to make an offer that is above market.

 

[housingrental]

Hi Bryan

I`d agree with the other posts above get him to provide a price or offer very low.
The seller is positioning themselves so that they don`t chop off upside if you offer more than they would have originally asked.
Depending on the particular property someone could see value in this as high as $680 000... but that`s probably not where you`d want to be...

Can you post the address (or general area )... what is market rents on turnover? what is the current tenant profile? How long have they been there? How long do you expect they`ll stay.

Rent seems extremely low for Waterloo... unless it`s a chopped up under size run down place... Are these bachelors units ? What is the suite mix?

Based on current numbers, and assuming 15% of rent for management, repairs, vacancy / uncollected rent, a cap rate of 7% would suggest a purchase price of $342 142 -

That being so... it shouldn`t mean much to you as :

A) Purchases in this price range are routinely going for 6% (and lower) cap rates

B) You might require a higher / lower return for your needs

C) I`ve not factored in anything for deferred maintenance

D) This doesn`t account for the rental rate being below market... which might add significant upside to the valuation...

Give me an email call if you`d like more specific property / location thoughts that wouldn`t be appropriate to share in a public forum

Btw... still never a bad time to sell to me...

 

[housingrental]

Midland is NOT Waterloo...



You should expect to pay less there per door as:



A) Lower rent per unit = lower net income per unit



B) Smaller area = more risk = higher cap rate on purchase




QUOTE (Rickson9 @ Dec 10 2009, 12:14 AM)
For me the value of this building is $240K to $320K. Otherwise I can find better returns elsewhere. At 8 units, this comes out to $30K to $40K per door which is similar to what my friend recently paid for his 10 unit apartment in Midland, Ontario. It cashflows very well. Personally I would never pay 10x gross for anything, but I am only speaking for myself.

 

[housingrental]

Also - What is lot size and zoning ? What is the land value?

 

[Rickson9]

QUOTE (housingrental @ Dec 10 2009, 02:12 PM)
Midland is NOT Waterloo...



You should expect to pay less there per door as:



A) Lower rent per unit = lower net income per unit



B) Smaller area = more risk = higher cap rate on purchase




The OP's prospect is still only worth $30K to $40K per door for me.



The Midland property has similar gross income per unit ($6500 p year) as the OP.



It doesn't matter to me if the property is in Midland or Waterloo. I can't speak for anybody else, but I don't adjust my cash flow calculations based on location.



I disagree with B. Higher price = more risk.

 

[housingrental]

I disagree. I don`t think you could judge what the property is worth to you when you don`t have the relevant information yet.

If the property is an 8 plex there`s likely some value in the land. There might be an opportunity, and economical to
add to or demolish the current building. Or purchase adjacent lot.

The market rents might be 50% higher than current. There might be significant turnover. There might be an opportunity to clean the units up and re-rent for 100%+ higher than current.

On B. - That doesn`t make much sense... please elaborate...



QUOTE (Rickson9 @ Dec 10 2009, 03:30 PM) The OP`s prospect is still only worth $30K to $40K per door for me.

The Midland property has similar gross income per unit ($6500 p year) as the OP.

It doesn`t matter to me if the property is in Midland or Waterloo. I can`t speak for anybody else, but I don`t adjust my cash flow calculations based on location.

I disagree with B. Higher price = more risk.

 

[Rickson9]

QUOTE (housingrental @ Dec 10 2009, 03:52 PM)
I disagree. I don't think you could judge what the property is worth to you when you don't have the relevant information yet.



If the property is an 8 plex there's likely some value in the land. There might be an opportunity, and economical to add to or demolish the current building. Or purchase adjacent lot.



The market rents might be 50% higher than current. There might be significant turnover. There might be an opportunity to clean the units up and re-rent for 100%+ higher than current.



On B. - That doesn't make much sense... please elaborate...




I think we will have to agree to disagree.



Only speaking for myself, the relevant information to me are the gross rents and the price. That's all I need to determine if I want to waste any more of the Seller's time. Some people want/need more info, other people want/need less. I can't speak to that.



As an aside, I'm not the most experienced investor by any stretch of the imagination, but I have never experienced cleaning up units to re-rent for a 100% premium. I have never done this and I personally don't know anybody who has done this. Kudos for those who have.



I may have misread the OP's question. My interpretation was the building's value as a cash flowing entity. Again, only speaking for myself, the OP's building is worth $30K to $40K per door. I didn't realize that the OP wanted other options to release value from the property such as demolishion or that they were considering buying the adjacent lot. I apologize to the OP if they felt that I failed to address this.

 

[invst4profit]

Investors need to be mindful of the fact that you pay based on what a property is worth, rental income wise, not what it might be worth as future value may never materialize.
In Ontario a LL that fails to increase rents to market, or at the very least by the allowable annual increase, is devaluing there investment.

The property in question having a rental income of approximately $4100/month (leaving out laundry income) is worth only what it generates.

Assuming expenses to run between 35% and 50% and expecting a minimum positive cash flow of $100/door/month a purchase price can be estimated fairly easily.

At 35% expenses ($1400) and 800/month positive cash flow the maximum one could pay using 100% as a mortgage number to allow a return on the cash invested @ 5% for 30yrs is approx $360.000.

With expenses in the 50% range ($2000) same conditions would be approximately $250,000

The below market rents are killing this as a good investment but someone will pay far more than $360,000 as Thomas has suggested. In addition if utilities are included it should be avoided.

 

[housingrental]

Hi Rickson9 thanks for your response!

Re 100% premium on re-rent your correct this is very rare - but I`ve done this a few times at a few locations..so it can be done.... generally from poor quality property manager running the place before I get it, it shows terrible, I go in and clean up to change to AAA, and re-rent...

The original poster has bought in the past, and currently owns, something he was hoping to add value to / develop able multi-family in Waterloo - though I appreciate you wouldn`t have known this.


QUOTE (Rickson9 @ Dec 10 2009, 04:01 PM) I think we will have to agree to disagree.

Only speaking for myself, the relevant information to me are the gross rents and the price. That`s all I need to determine if I want to waste any more of the Seller`s time. Some people want/need more info, other people want/need less. I can`t speak to that.

As an aside, I`m not the most experienced investor by any stretch of the imagination, but I have never experienced cleaning up units to re-rent for a 100% premium. I have never done this and I personally don`t know anybody who has done this. Kudos for those who have.

I may have misread the OP`s question. My interpretation was the building`s value as a cash flowing entity. Again, only speaking for myself, the OP`s building is worth $30K to $40K per door. I didn`t realize that the OP wanted other options to release value from the property such as demolishion or that they were considering buying the adjacent lot. I apologize to the OP if they felt that I failed to address this.