Property and Management job net ~$16k/mo- What is a reasonable purchase price? (agent, sales)
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Looking at an Atlanta opportunity to purchase a legal boarding house complex which nets about $16k/mo derived from rent and the managers base salary (as owner) with staff in place. This track record has been steady for a couple years and the future for the complex looks like net income will continue to slowly increase. Maybe 1/3 of net is management salary and 2/3 is from the rentals, what would you guess is the FMV (fair purchase price) of this property/management arrangement? Owning the units would mean being manager as well (although existing staff doesn't need a full time manager).
Looking at an Atlanta opportunity to purchase a legal boarding house complex
nets about $16k/mo derived from rent and the managers base salary (as owner) with staff in place.
Stop right there. NEVER co-mingle operating profits with owner compensation.
(Even if the owner is taking some salary out of the business.)
Quote:
Owning the units would mean being manager as well
(although existing staff doesn't need a full time manager).
aka known as "buying someone a job"
In the absence of the owner being on premises (24/7?) ...
what is the fair market value to employ genuinely qualified people to make up for that?
If your NOI is 192,000 per year, dependent upon your aversion to risk, general market factors unique to Atlanta (I know nothing of the area), among others, then at a generally risk averse 10 cap, you're looking at about 1.92M.
You can betcha that a bunch of expenses have been left off the listing. You will find that the genuine profit is a heck of a lot less than that.
I've looked at dozens of listings that the agent claimed were CAP 10 and were actually negative cash flow because they listed all the income and very few of the expenses.
Just hearing about your rooming house makes me queasy. Boarding houses don't make $16,000 a month. Someone is not being honest with you.
Try to find out all of the expenses. If you can't try to find data to make reasonable assumptions. Then find out the local average cap rate on similar types of property and you can calculate an approximate value from that.
Thank you davecj and shampoobanana for what sounds like a seasoned commercial real estate brokers advice! I have completed the appropriate due diligence and just have to decide what is a fair cap rate based upon similar property sales and my perceived risk factor factor! The income/expenses and net have been verified for this unique property. Not sure if i will try to place under contract, but wanted to investigate this opportunity.
I would model out the expected revenue and cash flows for a ~5 year period (assuming some vacancies, repairs, and other operating expenses). I would get that info from a commercial realtor and other owners of commercial properties. Then, I would do a standard DCF model (with a terminal value) using a range of rates of returns to calculate the NPV, which would be the max I'd be willing to pay.
You may even be able to get somebody's excel template from a google search.
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