May '24 • General discussion
Why I Passed on a 50-Unit Apartment Deal
(No Deal Is Better Than a Bad Deal…)
Here's why I said no to this 50-unit apartment deal.
A broker I connected with online sent me this property. The asking price was $3.9M. Current rents were $700 per month, while market rents are $800. The market CAP rate is 6.5%.
All units needed renovations, estimated at $5,000 per unit.
Let's break down the numbers.
If the property reached market rent of $800 per unit x 50 units x 12 months, the annual income would be $480,000. Assuming a 50% expense ratio, the NOI (Net Operating Income) would be $240,000.
Now, dividing that NOI by the 6.5% CAP rate gives us a value of about $3.7M.
The asking price is $3.9M, which is $200k over the proforma value, and renovations still need to be completed.
Based on these numbers, it seems the seller is pricing the property as if it were already renovated and rented at market rates. If I pay the asking price and then invest in renovations, there would be no profit margin. So, I had to pass.
What do you guys think?
At what price will this property make sense to you?
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Why I Passed on a 50-Unit Apartment Deal
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