From the desk:Medium Multifamily (5-20 Units)

The DSCR on this 10-unit won't clear no matter how I stack it

Seller has a 10-unit brick walkup, all 1BR, in a town of about 4,000 people an hour from anything. Asking 620k, which he's calling an 8 cap off his own NOI of roughly 49.6k. Books are a shoebox, but I got 24 months of bank deposits.

My version of the numbers: 10 units at 650 is 78k gross. Rural, so I'm using 8 percent vacancy and credit loss, and 45 percent expenses because the owner pays water, sewer, trash and heats the common hall. That gets me to about 39k NOI. Not 49.6k.

Lender quoted 75 percent, 25 year amortization, 5 year term, and wants 1.25x. Call it 465k of debt at 7.25 and I'm paying about 3,361 a month, 40.3k a year. That's a 0.97 DSCR. I'm underwater on the debt test before I've replaced a single roof.

To hit 1.25x at that rate I need annual debt service under 31.2k, so a loan around 360k, so 260k down on a 620k price. That's 42 percent down in a market where I'd struggle to sell it again at any price.

What's on my desk is whether I go back with 480k and let him laugh, or whether I'm wrong about the 45 percent. Two of the ten are vacant right now and he says they'd rent at 700 "if he cared to bother." I don't know how to price a market where there's no comparable sale in three years to check anything against.

Answer

3nataliehsuSO1BPRO7

You're trying to fix a price with financing. The whole deal is the 10k gap between his NOI and yours.

His 49.6k is 78k gross minus about 28k of expenses, which is a 36 percent ratio and no vacancy line at all. Your 39k is the same gross with vacancy and a 45 percent ratio. Neither of you is lying, you just picked different assumptions, and at a 7.5 cap that 10k is worth about 133k of price. That's the argument, and it's the only argument.

So back into price from the debt test instead of arguing cap rates. 1.25x on 39k NOI means debt service of 31.2k, which at your quoted 7.25 and 25 years is a loan of about 360k. At 75 percent LTV that's a 480k price. That number isn't an insult, it's just what a lender will finance against the income the building actually produces.

Two things I'd nail down before you send anything. First, which expenses are really his and which are the tenants', because owner-paid water and sewer in a rural town with a single master meter is the line that moves your ratio the most, and you can pull three years of utility billing history from the provider with his authorization. Second, the two vacants. If they truly rent at 700 then he should rent them and prove it, and if he won't, that tells you they need work he isn't disclosing.

And on comps: some states don't make sale prices public at all, so if you're in one of those, your appraiser will be leaning on income too. That actually helps you here.

The DSCR on this 10-unit won't clear no matter how I stack it

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