NOI Formulas, What Do Most Lenders Use To Find The True Value?
Trying to find out what formula most lenders use to get the NOI. What Cap Rate do they use 10% or what?
If I can do it; Is it better to get seller financing for 1 year and then refinance cash out?
I ran across a 1 million dollar 53-unit, that was worth 1.45 million. Use the formula "Rent per unit times # of units times 12 to get gross rent minus 10% vacancy minus 40% expense" to get NOI. With 10% cap rate. How accurate is this formula?
Thats pretty much what I use as well. Your vacancy rates will change for your area, in certain areas here in florida its 5%. Also your expenses should be 30% but with a management company it will take the other 10% putting it at 40.
Good Luck,
Kyle
Lenders that I'm familiar with do not use a formula such as you describe. Instead they use actual, historic income and expenses for the property, plus and minus adjustments to "normalize" the numbers.
Some of the more common adjustments would include:
1. If the property is currently owner managed, with no significant expenses, the lender will add a 4-5% management fee.
2. Capital expenditures are frequently misclassified as operating expenditures. It's to your advantage to reclassify them.
Hope this helps. If you need help "normalizing" an income and expense statement, drop me a line.
Les
Using a set percentage for expenses is not a good idea. There are enormous differences, mainly based on who pays utility bills at the complex. For example, I use $5-$6/sf expenses for master-metered buildings and $2.50-$3.00/sf for separate metered buildings You'll also find wide variability based on type of property and tenancy.
I'd suggest checking with local apartment associations/brokers/owners to find out what their actual expenses average per square foot.
Joe
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go over the numbers for the past 3-4 yrs
don't second guess cause you don't want to be at somebodys mercy. your trying to show that the place can pay for itself, so that the mortgage broker can can get you done.
Good advice so far...
The lender will demand that an independant appraisal is performed. That said, if the property has been mismanaged, and underperforming, the appraisal will come in much lower than it would if it had been managed efficiently (as commercial property is appraised based primarily on income).
Commercial realtors in your area should be able to give you an idea of what mid-sized apartment complexes are selling for, based on cap rates. Ask if they're applying a generic expense factor (say 35%) or if they're based on the reported expenses (generally reported low by sellers and realtors).
Seller financing for a year isn't a bad idea...especially if you're walking into some equity. You can get more flexible rates/terms with hardly any closing costs. You may even want him to carry a first and a second (that will later subordinate), and then cash out the first in a year or so.
As for your formula, if you can buy properties at the price that that formula gives you, then you'll be in pretty good shape (at least based on my experience in my area). Obviously start the negotiations out low, and have a max price offer. The main thing is to know where your break even point is (either on vacancy rate or on rent per unit). If you feel it will cash flow, and survive some turbulance in the market, then it may be a good thing.