OfflineHi, I'm in the middle of negotiations on a multifamily property and from the APOD and a cap of 10, my offer is very low but I went with it anyway. The counter offer was more than double my offer. Since I'm new to multifamily properties, I'm wondering if I'm not considering all the criteria I should. For some info on what I'm looking at, it is a 4 plex with the rents lowered to $690 monthly. Currently 1 unit is empty. The gross income from 2009 on the APOD is $27k with the total expenses of $17.5k. With a cap of 10, my offer was $110k. They also showed this year through July as having an income of $15.5k with expenses of $10.5k, which when figured out was less then 2009. I've also read where your monthly income should be 1% of you max offer. The 4 plex asking price is $280k, their counter offer was $250k. The monthly rent comparables for the 2bdrm 1.5bth units are from $750 to $850. As you can see the rent at $690 is very low. Is there something I'm missing or have they managed this property into the ground and want all they can get from it? This is also a short sale.
You are on the right track. Income producing properties are worth what they generate in income. It should always be gross income, minus a vacancy factor, minus property taxes, minus insurance, minus any other operating expense such as common are lighting, lawn care and snow removal. you also need to subtract an allowance for long term maintenance. Eventually you will need a new roof, four furnaces/ air conditioners, four water heaters and updating. After the math of subtracting the expenses, divide by your cap rate and that will give you your maximum offer.
You need to do some additional research on why these rents are so much lower than simiarl units. Certainly increasing the monthly income can significantly change the amount you would offer. If you can reasonably raise the rents it can raise your offer amount.
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The problem I'm running into is in order for me to assign these properties or go through a double close, with the rents so low, I can't justify an offer high enough for them to accept it. I have to go by what is instead of what could be when making an offer. I can't expect the new buyer to purchase a property knowing that they will have to raise the rent in order to get the cap they want. I don't understand why owners lower the rents to a rediculous amount knowing they are going to try and sell the property. They should know or be advised, this will hurt their chances of a better offer. Unless I'm way off in my assessment or I'm not taking into account something I should, these properties will not sell.
if you have to think too much into and it just doesn't make sense finance-wise, then that is the clearest sign you can have.
You could counter mid-way, but if its not right, its just not right