Priced my own 6 unit against a listed apartment name, bought the listed one

Small 6 unit came up two blocks from a building I already own. Asking 720k, in-place NOI 41k, so 5.7 percent before I put a dollar into it. It needed roofs on both structures and the boilers were original, call it 60k of near-term capex that the seller and I disagreed about.

At the same time I ran the numbers on two listed residential and manufactured housing names. Implied cap rates on the estimates I could find were sitting around 6.4 percent, on portfolios in better shape than the building in front of me, with no roofs for me to argue about.

I put 60k into the two listed names instead. 11 months on: 2,200 in dividends, share prices up around 9 percent combined.

What almost flipped me was the seller coming down 40k in week six. At 680k the going-in yield moved to 6.0 and I sat with the spreadsheet for a full evening. The thing that held me was the capex. A 6.0 that becomes a 5.2 after roofs isn't a 6.0.

What I'd keep is running the implied cap on a listed portfolio every single time a local deal crosses my desk. It costs twenty minutes and it turns "is this a good price" into "compared to what."

2 replies

3joe_delgado5AP4CPRO6

You gave up the loan pay-down and the ability to force value. Run it again with 75 percent debt on the 6 unit at whatever your bank actually quoted you, put the 60k of capex in year one, and push rents 8 percent over three years because you'd have managed it yourself. My guess is the levered equity return on the building beats an unlevered 6.4 on the listed name by a wide margin, and the real question is whether you want that job. Where does your number land when you run it that way?

4monica_tran3SF4CPRO6

41k of NOI on six units is also a job with a phone attached to it. Nobody puts a line on the model for the Saturday calls, and after five years of running a service business I'd price that line pretty high.