How to determine offer price for a small apartment complex?
I’m looking into making an offer on an 18 unit apartment complex and want to learn what others do to determine what their willing to offer. 

The apartment: class C structure in C neighborhood with on-site management (unlicensed property mngr has lived there 20 years for free and does some maintenance as well).The place looks clean and well taken care of but could be improved.  Tenants are retirees or working class.  The neighborhood isn’t really gentrifying and it isn’t very dangerous.  In a major city so little city growth risk.  1975 structure and recent ~100k capex spent on needed upgrades.  Probably could use another 20k in upgrades but not immediately necessary.  Gross: ~150k NOI: ~95k.   I live about 15 minutes from the property.  

They asked 1.5 mln.  Should I apply a capex (say 8%) to determine what I’m willing to pay?  I’m having difficulty determining what I’m willing to offer/pay.
[{"id": "hp3s5bv", "text": "$95k NOI on $150k gross sounds\u2026optimistic. Do your own analysis to determine NOI. They\u2019re pricing at ~6% Cap Rate. Is that in line with the local market? Is there opportunity to raise rents and/or lower expenses?", "replies": [{"id": "hp4aeyo", "text": "Thanks! Based off looking at T-12 and talking to the property manager they save a lot of money by doing there own maintenance, lawn work, etc.  and only calling plumbers, electricians etc. when they can\u2019t figure it out or it\u2019s out of their league.  One of the other tenants has discount rent to do yard work and maintenance help.  So ~15-20k/year (or more) is saved by tenants managing the apartments and doing maintenance.  Current NOI doesn\u2019t include capex saving and is the T-12 expenses from the gross.  Local cap rates are ~7% for class C but that\u2019s just my guess based off following the market.  The room to raise rents is mostly based on recent inflation and increase in rents.  Probably a 10% increase in rent is possible based off other apartments.", "replies": [{"id": "hppm920", "text": "Are they including all expenses such as property tax? Agree with others\u2019 sentiment that $95k NOI on that gross seems high. Many landlords aren\u2019t sophisticated and don\u2019t show every expense on the P&amp;L. Usually because they don\u2019t manage their books properly.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hp3twpq", "text": "We expect a 50-55% expense ratio on larger apartment complexes (100+ units) and smaller complexes are more expense to operate so I doubt you will be able to replicate the NOI.  I would find out what the going cap rate is in the market and as always figure out your proforma on rents and other income and expenses. From there you can figure out a value. Your best source is another operator or maybe a Multifamily broker in your area. Also get your capex budget figured out now so you aren\u2019t using future opex or excess cash flow for work that will need to be done in the future. The #1 mistake we see with operators is not being capitalized properly. We buy many of those properties at a discount after the operator went into a \u201cdeath spiral\u201d on a project.", "replies": [{"id": "hp4e7nb", "text": "Thanks!  Yeah the place is currently very livable.  Bones seemed pretty good, but there were definitely some upgrades that I\u2019d like to see and were requested by the tenants and property manager.  New carpet in ~1/2 the units and an electronic security gate were the two things that were requested by tenants and property manager when I asked them what improvements they\u2019d like.  The tenant class doesn\u2019t really ask for kitchen and bathroom upgrades currently.  How would you recommend calculating in these expected near-term capital expenses?", "replies": [{"id": "hp4eqft", "text": "Sounds like it may have some potential. That\u2019s tough without knowing the market. It\u2019s highly market dependent.  Talk to someone in the area that knows the market well and get some contractor bids.", "replies": [], "depth": 3}], "depth": 2}, {"id": "hp54vnj", "text": "50-55% expenses on a 100 unit deal feels pretty heavy. We typically see high 30s to low 40s on the T12 and end up underwriting mid 40s after inflating expenses (or cutting where capable), tax reassessment, and insurance premiums, which have skyrocketed.", "replies": [{"id": "hp61tnv", "text": "I\u2019m in Texas so our taxes are CRAZY so depending on market you might be much lower. Very market dependent for sure.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hp55pix", "text": "Determine through research what market cap rates are for this type of product and value the deal off your desired return. Understand small multifamily like this almost always trades over value because you have a larger, less sophisticated buyer pool. Sounds like you could push rents a good bit with more professional maintenance/management. Also, no way I\u2019m giving a free employee unit on an 18 unit deal and having 6% economic vacancy from the start. In addition to your normal due diligence, I\u2019d also really dig into your demographic on a C asset and your ability to collect rent in an environment where courts are backlogged with processing evictions. If you have just 2-3 tenants there not current on rent you could have a legitimate issue covering your debt service if you plan on putting debt on this property", "replies": [{"id": "hp5oxz6", "text": "Thanks!  I\u2019ll run scenarios with current situation of on-site PM vs professional property management.  Current on-site PM has a \u201cno pay, no stay\u201d policy.  And the property was not affected by COVID non paying tenants.  The property more of seems like a community to be honest where the current tenant/PM runs the show and the other tenants would even comment on how he keeps them all happy.", "replies": [{"id": "hqe0b3r", "text": "Again all goes back to what your desired yield is. If in a good market, this asset is ripe for mark to market. Regardless, if I\u2019m taking the risk here I m 120% third party managing this asset and immediately ending the \u201ccommunity\u201d aspect of rent collections. There should never be a tenant/PM \u201crunning the show\u201d- it\u2019s your property. To be honest, the value in that deal is a management play. lHire a 3rd party management co to manage the deal. Sure they\u2019ll take 3-5% of your EGI, but on an 18 unit deal that\u2019s only $2-4k.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hp5owgy", "text": "Verify:\n-40 Cert is complete\n-no pending liens/violations\n-cast iron plumbing?\n-roof leaks\n-ceiling stains", "replies": [{"id": "hp5wg13", "text": "Thanks!  A new pitched roof was added to the property.  It previously had a flat roof and some stains/leaks but no problems since the new roof per tenant discussions.  Some plumbing updates were done but I\u2019m not sure if behind the walls the plumbing is cast iron or not.  I did notice they are behind on last years taxes.  What is a 40 cert?  I haven\u2019t heard of that before - but I am new to commercial real estate.", "replies": [{"id": "hpab107", "text": "I should gave said 40 \u201cyear\u201d certification. In Florida, every comercial bldg has to be inspected after 40 years (then every 10). It\u2019s a standard report that needs to be submitted to the local municipality. It\u2019s in 2 parts, Structure &amp; Electrical. Whatever is found non-compliant but be addressed. Then the permitting, GC proposals, plans/drawings, time/materials, inspections fees and costs begin. Lots of fun! If a 40 yr cert is not done the bldg can be declared uninhabitable and fines can be up-to $100\u2019s per day. \n\nTheoretically, this is what prevents bldgs to colapse like the one in Miami Beach this year.\n\nIf you\u2019re buying property, this can be a huge negotiating point to receive credit for, if 40 yr cert is coming up soon. \n\nI\u2019m currently in the middle of one costing me about $100k for 10 bldg\u2019s=37 units built in \u201848.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hp61v8g", "text": "Figure out average unit rent rate based on T-12 and then figure out what your pro-forms rent after improvements would be. Any increase in rent is a huge increase in the value of the property as you know. \n\nIs this a value-add investment or more of a core or opportunistic play?\n\nMain concerns should be \n- retires (fixed incomes) tenants\n- neighborhood isn\u2019t gentrifying \n- little city growth risk \n- 1975 structure\n- tenets requesting security gate (apparently safety concerns)\n\nIf the area isn\u2019t gentrifying or at least growing, it\u2019s dying. \n\nOpportunities are\n- not professionally managed\n- not professionally maintained\n- security improvements\n- raise rents after significant improvements. \n\n\nHave you done secret shopping to determine what similar properties are charging/offering?", "replies": [{"id": "hp6lns0", "text": "Thanks for the response!  A value-add opportunity.  New houses are coming up in the neighborhood, but it isn\u2019t gentrifying rapidly and the location isn\u2019t near to a \u201ccool\u201d part of town.  Its growing but area is not a high-density area and it is pretty sketchy ~2 miles away from the property.  I haven\u2019t done any secret shopping, I\u2019ll do that.  5k square foot lots in the area are going for ~40-70k/lot.  Property is in a major Texas city", "replies": [], "depth": 2}], "depth": 1}, {"id": "hp6diwr", "text": "Lol 8% cap? Jesus", "replies": [{"id": "hp6e8x4", "text": "Why is that a surprising target cap rate?  Genuinely curious.", "replies": [{"id": "hp6es90", "text": "I\u2019m in arizona and you can\u2019t get anything for like over a 5.5 max on actuals. What state/city are you in?", "replies": [], "depth": 3}, {"id": "hp6ez13", "text": "If you can get something at an 8 that\u2019s awesome tbh.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hp6lczi", "text": "Cap rate, cash flow, vacancy rate comparing with other candidates.", "replies": [], "depth": 1}, {"id": "hp8zqgu", "text": "https://youtu.be/m8QIzxXRMGA\n\nThis YouTube channel has great info", "replies": [], "depth": 1}]