Someone once said..” You have to spend money to make money”.
Warning: This message will hurt a lowballers feelings but may may help you come to your senses.
There is a pretty good Return On Investment (ROI) when it comes to multi-family housing for investors today. The key is to easily calculate what the ROI is.
Most investors look for 8-15+% Return On Investment depending on the risk. Below, I will show you how to calculate a fair price and return.
If you find a property that has Net Operating Income (NOI) in keeping with those percentages above or more, BUY IT!
NOI means your profit after expenses.
Example:
A 3 Unit investment rental property is for sale for $150,000
The property has gross rents of $32,400 per year ($900 per unit with tenants pay electric, heat and cable) .
Average expenses owner pay year total $14,480
Taxes ($4000), Insurance ($1200), Water , Sewer, Trash ($1,200), 5% vacancy ($1,620), 10% repairs ($3,240), 10% property management fees ($3,240).
The Net Operating Income is $32,400-$14,480= $17,920 NOI
So the property is listed for $150,00 The NOI is $17,920 and the ROI if you paid full price, is a not bad 12%
NOI\ROI= Purchase Price. $17,920 NOI\12% ROI=$149,300 . So…paying full price for this property would be the wisest thing to do if you really want to land it in your portfolio and earn a not too shabby 12% ROI.
What befuddles me is some investors refuse to pay full price and someone else gets the opportunity for some good income. The urge to lowball is in some investors blood and lowballers fail to use their mathematical side of their brains. I have seen some foolish offers that sellers obviously refused for a fair price.
Believe it or not, sometimes a fair price may be the asking price. By using my calculations, you can tell if a seller is offering you very little ROI or a good ROI and Purchase Price.
What is a low ball offer in my opinion?
The property above exampled is yielding 12% ROI at a full price offer of $150,000. A “savvy investor” who really does not know math offers an insulting $115,000. A difference of $35,000.
Most of the times an owner wont even counter.
Lets do some math.
Your NOI is about $17,900 per year x 30 years long term investment period = $537,000 ROI
So the moral of the story is “You have to spend money to make money” If you lowball and lose the deal for $35,000 you miss out on the possible $500,000 you could make in the long haul.
Personal Testimony: I purchased a 5 unit in 2002. Enjoyed an average 11% ROI for 17 years. Paid $164,000 and profited about $300k thus far. I still have the property…no it is not for sale. 🙂
Based on the Income Approach, I used above, my 5 Unit is worth about $165,000 should I decide to cash out. PS My rents are, for years, significantly below current market rent. I have long term great tenants and enjoy that luxury over vacancy problems. -Gary Pace
