486-Unit Multifamily

This situation was extraordinarily unique as this multifamily complex was a short-sale situation. The owners simply over-leveraged the property creating a situation where the incoming rents weren't enough to cover the encumbrances on the property which led to the bank short selling the property to us. This was an extremely rare situation where the bank was motivated to get the property off of their books. We valued the property at around $14M. We offered the bank $4M. To our surprise, the bank accepted the offer. There was very little deferred maintenance on this property as the existing owners at the time really took care of the property. He was a very wealthy individual who owned several thousand units in the Texas area and just wanted this property eliminated from his holdings. We performed no repairs. We just kept up with the existing maintenance schedule. We ultimately ended up selling the property for $10M approximately 3 years later.

Here's how the valuation is calculated:

486 units in a market with 85% occupancy means that 413 units are rented on average annually. The average rent was $550. This brings the monthly income to $227K on average. Multiplying the monthly income by 12 months for the year equals $2.8M annually. With a 50% expense ratio brings the net operating income to $1.4M per year. The market capitalization rate was 10%.

Definition of cap rate:

Cap rate is the amount of net income generated compared to the price paid for the building. 

Example: If you paid $1M for a building and the building currently nets $100K. Your capitalization rate (also referred to as cap rate) would be 10%.

In the case of this property, we would divide the net income of $1.4M by the market capitalization rate (also referred to as cap rate) of .10. This brings the value to $14M.

In Conclusion:

A deal is not a good deal unless everyone feels like they have gained something (a win / win scenario). We had a series of partners whose investment totaled $4.1M. They earned 15% annually for 3 years, which totaled $1.85M. They also received an additional 15% premium at the end of the term which totaled an additional $615K for a grand total of $2.46M. The end buyer received a building with an instant $4M in equity. Our company generated $3.1M after holding and closing costs.