Let's evaluate a multifamily income property that is for sale (as of Feb 22, 2011) where the seller offers seller financing.
The property for sale is a 10 unit multifamily located in Walpole, MA. Â It is listed for $1,100,000. Â In this example, I will compute the numbers for this investment, analyze the numbers, and see what options are open because of the availability of seller financing.
First, let's figure out what the rental income might be. Â I base my rent numbers on rent figures that I find through MLS PIN for Walpole.
- 5 1-Bedroom Units @ $800 per unit is $4,000 per month.
- 4 2-Bedroom Units @ $1,000Â per unit is $4,000 per month.
- 1 3-Bedroom Unit @ $1,250Â per unit is $1,250 per month.
That brings us to $9,250 per month or $111,000 per year from my estimates. Â This figure compares to $98,400 per year as the seller claims. Â The reason that I calculate my own figures is because I do not know anything regarding the accuracy of the listing or whether the seller is telling the truth. Â In this case, the numbers are in the same ballpark so I move on.
I next calculate the cap rate and gross rent multiplier for this multifamily income property. Â The seller provided expense numbers of $14,374 per year. Â That means that the seller achieves a net operating income (NOI) of $84,026 per year. Â The cap rate would be $84,026 / $1,100,000 or 7.6%. Â The gross rent multiplier according to the seller's figures is 11.2. Â The gross rent multiplier according to my rental income figure is 9.9.
The cap rate is OK on its own. Â However, we have several factors that an investor must consider. Â The expenses reported by the seller typically leaves items out that often should be included in the analysis. Â For example, the expenses did not include property management. Â You also have to consider that you can't always take the seller at his word and assume there might be some skimping on expenses.
Next an investor has to consider what the typically cap rate for comparable multifamily income properties in the Walpole area market. Â Does this cap rate compare favorably?
Let's think about the gross rent multiplier. Â Is 11.2 or 9.9 good or bad? Â Is the seller charging market rents? Â Does the seller have tenants who are delinquent on their payments? Â My point is that you need to know the numbers but they only provide guidance. Â You need to dig deeper the numbers warrant further investigation.
For this example analysis, I'll assume that that cap rate and the gross rent multiplier are below par. Â Since the seller is willing to offer financing, there are several ways that negotiations can go if an investor remains interested. Â The buyer & seller might agree on a price at which the cap rate makes sense and the seller makes money on the loan interest. Â Alternatively, the seller might be firm on the price but is willing to offer great terms and a good interest rate on the loan to the buyer. Â These options, due to the availability of seller financing, might open the door for a deal that would not open in lender financed deals.
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