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Is this a good deal??

Posted by shinerealty on June 20, 2020
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I often get asked this question by purchasers when looking at a complex and generally what they are actually asking me is; “Is the multiple correct and am I paying too much?”.

My view has always been that the market will dictate the multiple.  I am not a valuer and as such multiples are not my expertise so I have no view on weather the multiple is correct or not.  My advice is this you need to look at your purchase from many angles in order to work out if it is a good deal or not.  Each case is mutually exclusive and should be treated as such.

From a financial perspective, even prior to looking at complexes, you need to ascertain how much money you are willing to spend.  This means how much cash/equity you currently owe/control and how much money you are willing to borrow (speak to your MR business banker or broker for details on lending capacities).  You notice I used ‘willing to borrow’ not ‘able to borrow’.  These are two distinctly different things and being able to borrow the money does not necessarily mean you should.  The business cash flow needs to be able to support the borrowings as well as your return on equity and wages.  If this is not possible then you have either borrowed too much money or paid too much for the complex.  Prepare cash flow projections for the first few years based on the Profit & Loss provided by the vendors and any other information they are willing to provide (your accountant can assist at this stage).

From an environmental point of view look at the complex surrounds and common areas you will be responsible for.  Discuss the hours of work required to manage this.  Some managers will enjoy lager grounds and physical work as others may not.  Higher prices may be paid for easier to manage properties and visa versa.  Make sure you factor in your efforts back to the financial perspective so you are being adequately compensated for your time.  Make sure the body corporate salary is adequate for the tasks required.

Investigate the rental pool to ascertain the ownership and potential in the complex.  A complex with a greater potential for growth in the rental pool may attract higher prices from astute purchasers, but beware and do your homework.  From a business point of view buying a complex of owner occupied properties can be difficult to change even to the most experienced managers.

As you can see there are many factors that determine if you are “getting a good deal”  I have only mentioned a few above and it is not always all about the financials.  Purchasers may be willing to pay premiums for prestige, potential or ease of living, it is up to you to determine what you are willing to pay for.  So if you want to know if the multiple you are paying for a complex is correct in term of the current market, seek out a qualified MR valuer and they will tell you hands down.  This will give you a starting point and then you need to determine what a “Good Deal” is for you.

Contributor: Sam Hodgetts CPA

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