How to Calculate the Value of Multifamily Real Estate

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Most consumers do not grasp the difference between the price and the value of a product or service. Price is simply the amount of money paid or charged for something. When we focus on price, we are focusing on the short-term acquisition of a product. Value, on the other hand, focuses on the long-term aspect of the purchase.

Price is what a buyer spends, and value is what they receive in the transaction. When a buyer has received more value from a product than what they spent, this purchase is viewed as possessing great value. If a buyer values your product and can find a solution to his problem with your product more than he values his money, then he will purchase your product. People who focus on cost focus on the total cost of ownership, but people who focus on value focus on the total picture and how the product will create a solution.

Now, how can we compute value in real estate and specifically multifamily real estate? There are basically three methods of calculating real estate value: the cost approach, the sales approach, and the income approach. The sales approach is widely used in valuing single family homes, and the cost approach is utilized for properties that have few comps and for new properties (such as a church or school). Let’s focus on the income method, which utilizes the net operating income and cap rates to determine the property’s value. This is by far the best method to analyze apartments.

Hyperbolic Discounting

Before we dive into analyzing the value of a multifamily property, I would like to discuss the term “hyperbolic discounting” and why I think a significant amount of investors shy away from investing in multis. I was introduced to this term by Gary Keller while reading the book The One Thing, and hyperbolic discounting states that the farther away a reward is, the less motivated an individual is to achieve it. If I have a choice of earning $100 in two weeks or earning $500 in 18 months, most people will choose the present reward over the future reward overwhelmingly. This impulse of instant gratification is becoming evermore popular within our society.

This may explain why strategies such as wholesaling and fix and flipping are extremely popular to investors. These strategies employ much shorter time horizons than multifamily investments. A wholesaler can earn a profit in a matter of weeks, while a multifamily investor usually needs to dedicate a much longer time horizon to execute his business plan to generate his return.

There are other challenges that investors encounter when deciding upon multifamily investments, such as lack of capital or lack of experience, but I feel that not being able to focus on the long-term dissuades many investors from multifamily investing. I sometimes wonder if our society is losing the willpower and the persistence to see things through.

If you understand the value and the various benefits that multifamily offers, the decision of delayed gratification will be a no-brainer. So what are the benefits of multifamily, and how do we determine the value?


Related: The 4 Phases of a Real Estate Cycle (& When to Buy a Multifamily for Maximum Profitability)

6 Benefits of Investing in Multifamily Real Estate

Here is a list of benefits:

  1. Cash flow. Apartments generate monthly income, what I like to refer to as wallet money. I compare cash flow to dividends paid by stocks. The money rolls in every month.
  2. Control. You are the captain of your own ship. You have the ability to control every decision that affects your investment.
  3. Tax advantages. It’s not what you make, it’s what you keep that’s important, and real estate offers tremendous tax benefits. Why would the government create advantages for this tax class? The government realizes it does not have the ability to deliver affordable housing, and by offering these benefits, it is trying to stimulate the private sector to step in and fill the void.
  4. Economy of scale: This is a huge advantage when trying to scale your business. I find it much easier trying to collect rent from 30 tenants in my apartment building rather than running all across the city to collect from my single family homes. It is easier and more cost effective to have more units under one roof.
  5. Ability to force the appreciation: The value is not as reliant on comps as it is your ability to increase the value through growing the NOI.
  6. Velocity of money: This refers to the ability to refinance a property, withdraw the equity, maintain control of the asset, and invest the refinance proceeds into another property. Banks are the ideal example of “velocitizing” money. They borrow funds from their customers and lend the proceeds out to individuals looking for loans. The faster the money moves, the wealthier you become.

Multifamily Valuation: How to Calculate Value in Multifamily Investing

Now that you’ve seen the incredible benefits that the multifamily space provides, how do you calculate value? In multifamily investing, it is all about the net operating income (NOI) of the property and the fact that the investor is purchasing the property based on an income stream. Let me provide you with a few definitions:

Operating Expenses

Costs that are incurred to maintain and run a property. Some examples include trash, snow plowing, and pest control.

Capital Expenditures

An expenditure for an asset that will improve or extend the useful life of an existing asset for a period to exceed one year. Some examples include water heaters, driveways, roofs and A/C units. I like to set aside $250 per unit per year in a cap ex account to address these “repairs.”

You may have to set aside a larger amount, depending upon the age and condition of the property. The cap ex figure falls below the net operating income, so it does not affect the value of the asset, but it will certainly affect your cash flow, i.e. the money you put in your pocket!

Net Operating Income

Annual income generated from a property less total operating expenses.

Cap Rate

The rate of return on an investment property based on the income. Cap rates are specific to a market and are affected by the type of property class (A, B, C, D) you are investing in. A broker should be able to tell you the cap rate in his market.


Property Class

  • A Properties: Newest, shiniest asset. They contain many amenities and cater to white-collar workers. Expect low cap rates, around 2-4. This class of asset is poor at cash flowing but has the ability to appreciate greatly. I tend to think that investors choose A properties to maintain their wealth, not create it.
  • B Properties: Built within the last 20 years, this class caters to a mix of white and blue-collar workers. This type of property may show a bit of deferred maintenance, but overall, it has a nice mix of cash flow and potential appreciation. Look for cap rates around 5-7.
  • C Properties: My first real estate brokers defined C properties as “crap” properties, but loved their ability to generate substantial cash flow. I tend to agree with his candid analysis. These properties are usually 30+ years old and have deferred maintenance issues. Cap rates hover between 8-10 on these properties.
  • D Properties: The lowest class of property. They are usually located in inner cities where it’s difficult to collect the rent and vacancy rates are high. These properties are highly management intensive, and the tenant base is often difficult to deal with. Investors get lured into investing in these properties due to the low prices, but soon realize they got more than they bargained for. 

The goal is to increase the NOI by either increasing revenues or by decreasing expenses. You are trying to force the appreciation of the asset by increasing the NOI.  The term that is thrown around to accomplish this task is “reposition.” When you reposition an asset, you are adding value by changing the appearance of the property or the operations of the property, all to increase the NOI. You are focusing on the value-adds to a property.

Related: The #1 Thing Newbies Should Do to Get Started With Multifamily Investing

Example of a Successful Multifamily Reposition

Let me give you a quick example of a reposition on one of our assets and different types of value-adds we instituted. We purchased a property that had rents that were well below market, and many units that were vacant. Our goal was to address desperately needed deferred maintenance, while filling the vacant units.

We eventually filled all the vacant units and increased the rent rates on the current tenants from $450 per month to $625 per month. In a span of 12 months, revenue exploded from $53,000 per month to over $90,000 per month. In this example, we were able to increase the value of the property from $4.1 million to just over $6.3 million in only 12 months!

Examples of Value-Adds

Potential value-add items might include:

  • Adding upscale touches, such as two-tone paint and upgraded kitchen floors
  • Offering amenities, such as a fitness center or clubhouse
  • Instituting Ratio Utility Billing System (RUBS)
  • Changing the zoning on a property to a more favorable use
  • Generating new sources of revenue, such as laundry, pet fees, late fees, application fees and storage fees
  • Renovating a property to allow the owner to increase rents
  • Increasing the quality of the tenant base
  • Repositioning a C Property into a B property

All of the value-adds listed above need to focus on either increasing the revenue or decreasing the expenses. If you decide to install granite countertops, but you realize that this upgrade has failed to increase revenue, this would NOT be a value-add. One of the biggest mistakes investors make is to over-improve a property without focusing on the ability of the improvement to increase revenue. (I’ve done that a couple of times. OUCH!)

This is the beauty in multifamily real estate. You have the ability to increase the value of your asset by employing sound management principles to increase the NOI, thereby increasing the value.


How to Calculate Multifamily Value Using Cap Rates

Now let’s tackle how you calculate the value of a property using cap rates. You would take the NOI of a property and divide it by the cap rate.

NOI/Cap Rate = Value

For instance, if the property had an NOI of $150,000 and the cap rate was 6, the property value would be $2,500,000 (150,000/.06). If the NOI increased to $180,000, the value would increase to $3,000,000. A $30,000 increase in NOI generated a $500,000 increase in value.

Cap rates have an inverse relationship with market value. When cap rates compress, as we are witnessing in the current real estate market, the value increases — and vice versa. It’s fantastic when you own property and cap rates are falling, but a real bummer when you are trying to invest. The formula for cap rates is:

NOI/Price = Cap Rate

For example, if the property had an NOI of $50,000 and was listed for $500,000, then the cap rate would be 10 ($50,000/$500,000).

Our strategy is to purchase assets based on actual numbers. We ask the seller to provide us with the last 12 months of income and expense figures, as well as the rent roll. Once you purchase on actuals, your job is to go to work on the NOI. In life, it’s not what you buy but what you pay that is critical to the success of any investment.

My goal in this article has been to describe what “value” is, why some investors are hesitant to jump into multifamily investing, the benefits of investing in this asset class, how to analyze a multifamily property and how to implement value-adds to an investment. Remember, at the end of the day, it’s all about the income versus the expenses.


Related: Thinking About Buying a Multifamily? STOP! Wait Until You Read This!

Your Task

Decide now that you are ready to invest in apartments. Seek out websites, such as BiggerPockets, to begin your education. Immerse yourself in podcasts and books that focus solely on multifamily investing. Learn how to properly underwrite (another fancy word for analyze) deals.

Begin to visit websites that list multifamily properties, such as Loopnet, Costar, and, to become familiar with your market and the “players” in the market. Start networking with these individuals and ask them to start sending you deals to analyze. Expect to receive subpar deals in the beginning, but don’t quit. Tell them why these deals don’t work for you, and continue to analyze more deals. Formulate a business plan and strategy on how you will create value once you begin investing.

We’re republishing this article to help out our newer readers.

Investors: Do you choose to invest in multifamily real estate? Why or why not? Any questions about the valuation process?

Leave your questions and comments below!

About Author

Gino Barbaro

Gino Barbaro is a father of six and the co-founder of Jake & Gino LLC, a real estate education company focused on multifamily investing. He has grown his portfolio to 674 units in three years and is the best-selling author of "Wheelbarrow Profits".


  1. I am fine with most of your value-add suggestions. However, too many landlords perform the deferred maintenance you mention, and then think they should raise the rent because of it. Sometimes they go so far as to call the deferred maintenance they perform a “remodel.” Timely maintenance should be a standard feature of every rental, not an amenity.

    I would also avoid instituting a multiplicity of fees for the sole purpose of generating revenue. A fee is supposed to actually pay for something, not be mere profit-taking.

    • Gino Barbaro

      Why else would you institute a fee? You are running a business. Application fees, pet fees, storage fees, late fees, these are all standard and are used to supplement income. You charge late fees to discourage a tenant from paying late.
      Many landlords do not run their property as a business and this revenue is left on the table. If you do not want to institute a multiplicity of fees, you have that right if you are the owner. Fees are for income.

      • People hate fees for this, that and another thing. For example, it is one of the major complaints against airlines today. Then there are the pointless bank fees that used to not exist. People hate those.

        According to California law, the landlord must be able to document that 100% of the “application fee” was used to cover the expenses of the application, for example, the cost of the credit report. Most landlords would not be able to provide this proof, and most tenants do not ask. The fact is the cost of an application is nominal, and the fee is nothing but profit-taking.

        Years ago, I moved into an apartment, but because of a problem, the property manager moved me into another unit after two weeks. A month later, the property manager asked me to pay a $200 “cleaning fee” even though she conceded that I had left the apartment “immaculate.” She said she was required to hire someone to do a full cleaning between every tenant for sanitation reasons regardless of how short the occupancy. I said, “Fine, show me the receipt, and I will reimburse you.” Naturally, there was no receipt. It was merely an attempt to take profit.

        Today with over half of renters cost-burdened, and half of those paying over 50% of their wages toward rent, tenants are already paying more than enough without the addition of dubious fees.

  2. Annabelle Dilworth on

    Basically an owner or any property manager will end up being competitive in the market in which the property is located otherwise tenants will just move (which is another expense) — so bottom line expense to tenant has to be competitive for market in which property exists — everything else; fees, charges (exception of late rent charges) is kind of academic in my opinion (the discussion of)— it’s all market determined. I’ve been property owner in major metropolitan area for over 50 years.

  3. bob bowling

    Gino, you stated, “For example, if the property had an NOI of $50,000 and was listed for $500,000, then the cap rate would be 10 ($50,000/$500,000).” Listing prices do not create cap rates. You have to have a closed sale to analyze to determine a cap rate. Also brokers will tell you all kids of numbers if you ask about cap rates. The only cap rates to use for valuing a property should be analyzed by a third party reporting company. These people work for firms like Korpacz.

    If you are buying property that is not encumbered by long term leases you are best to use the direct sales comparison approach to valuation.

  4. Joe Fairless

    Gino, great article. This gives such a nice overview for people who want to learn more about the multifamily biz. Enjoyed reading about the different value-add methods as well as your examples/case studies. Thanks for putting this together.

      • Nick B.

        Hi Link,

        There are two schools of though on this one. One is that replacement reserves is an expenses because it gets spent sooner or later. Having it in the expense category forces the underwriter to lower property value (higher expenses – lower NOI) and make it more conservative. Another approach is to account for replacement reserves below NOI and that does not affect property value and hence allows for more aggressive assumptions. As an investor, I prefer for replacement reserves to be a part of operation expenses.


        • bob bowling

          Nick, they are called operating expenses and Net Operating Income for a for a reason. Replacement reserves are an expense but NOT an operating expense. Any deviation from this and you no longer have NOI. Without NOI you cannot determine cap rates. You’ve basically crapped on the process, hence you have a Crap Rate.

  5. Alina Trigub


    Thank you for sharing your thought process on How to Calculate the Value of Multifamily. You mentioned a few sites to use for checking our MFH and calculating the properties’ values. However if the Cap Rate offered by a realtor is not reliable then your calculated value is useless as well?! How do you work around this issue?


    • bob bowling

      Alina, Too many people think a cap rate is just the reported NOI divided by the reported sales price. To be useful you have to see ALL the calculations that was done in the sale analysis that should be done by a third party reporting company. You want to see AND analyze each cap rate comp yourself to properly determine what cap rate is best to used to value the NOI that you are buying. A Broker can provide you with these reports but to just blindly take their word that cap rates are 9% is foolish.

  6. Michael Ferber

    Gino, great article, very informative in simple words.
    I’m pretty new at this and have invested in some single home rentals.
    Can you elaborate on different ‘EXIT STRATEGIES’ . I would imagine the target buyer for a multifamily would be an INVESTOR or a wholesaler. on a short term, even though you were able to show an increase in the NOI, would you be able to realize that difference selling to an ‘investor’?
    What i’m getting to i guess is, on a 1-3 (4) year plan, would it be more of an advantage to buy several Duplexes, cosmetically renovate, and putting on the market 2-3 years later using COMPS rather targeting an investor using CAP rates.
    Thank you.

    • Gino Barbaro

      An exit strategy is specific to the individual. Jake likes to say he only buys, so his exit is to hold long term. Eventually, the principle will be paid down, he can either 1031 or pass on to his heirs. I also like the long term hold on our properties.
      Some investors like a shorter horizon, reposition a property and then flip the earnings into a larger property.
      Depends what you want to achieve. We want passive income, tax advantages, and wealth creation, thus we like to hold long term
      Hope that helps

  7. Darla Nunes

    Ok I’m getting creative starting today! I found a a property on the river with 2 apt size homes that need some work, asking price $220.000 (great deal) but I have no $$ I have 2 notes out there already. So I asked the broker if the seller may be interested in a “carry back” she said I doubt it bc he has to sell to pay her in divorce, I said oh better yet! This will give her steady pmts & he can claim it in the divorce as an equalization & it be tax free, because that’s what I did in my divorce after 25 years. So she asked & they agreed to “entertain” the idea! So as I always say: “just ask, the worst they can say is “No” & we’ve all been told much worse!” So I’m off today at 1pm to check it out & do the “formula” please my experienced friends out there, have my back, teach me, tell me truth, I will get back with details, this will be my 1st “stepping out” alone on my own:)

  8. Great article. The explanation of the cap rate, how to calculate it, and how to utilize the NOI/Cap rate equation to determine valuation were extremely helpful. Also, the way that you explained what an increase in NOI does to the cap rate = brilliant. I look forward to more great articles.

  9. james moore

    Great article Gino.

    I watched your BiggerPockets podcast some time ago. Great story and presentation.

    The big takeway from this article are your thoughts on repositioning the actual asset class itself to increase NOI. I believe that anyone can do this with a SFR model just as easily, if they make the right purchase and have a good eye for design. Many out there probably hope to get into large multifamily investing someday, as I do, but for now anyone can develop the chops to take C class homes and convert them into B class assets. I believe learning to do this now on a smaller scale, people will understand the very means and methods later on to do this on a larger and larger scale as they grow. But you are right, it is very easy to over think and over spend on certain upgrades that are overdone. Therefore one has to be careful and accept they may flub up once or twice along the way, but it is okay because learning and making some mistakes is just part of the process. Better yet to learn these mistakes while on a smaller scale than when going with big budgets as you are likely working with.

    An overarching goal that I think many new investors should strive for is learning how to do just about any exterior or interior upgrade themselves at least once or twice. Because in starting out in the SFR class, the more skills you can acquire the more advantage you have. And the more of an advantage you have the more you can save on expenses while you create those important vaule adds and knowing what it requires. These skills of course can be brought along with you when the time arrives for you to move up into multifamiliy investing. Those having these skills and intimate knowledge and if learned as early on as possible, will make things go much easier for you in bringing in better returns and attracting better tenents. And ultimately setting yourself up for getting into bigger and better deals down the road. It just seems to work out that way for many who apply this simple principle. Some may simply think of this process as paying your dues as you go about the journey in building up wealth in real estate. That is how I think about it anyway and this article touches on that importance though not directly. The takeaway message is this, that it takes time and skills not just money and knowledge of basic concepts. It is an impoartnant start however. You need to know what the differences are and what the numbers all mean as Gino points out so well here. My view is that the principles of NOI, cap rate and repositioning can apply just as well in dealing with the SFR housing model approach.

    I say therefore the time has never been better than to learn right now to take C class homes and bump them up into becoming B class assets. For one, it takes less investment and risk, but becomes just as indespensible when the day comes, that many of us here dream about, where such skills can be taken to prepare us to finally scale up and have greater chances for our continued success.

    For now I have the time to learn these skills and become well-rounded, and it will be worth anyone’s while to try this out, too. One simple way to look at this process is that the more skills you can learn the more you can build up your experiential bank account. Where you will someday be able to leaverage all of your acquired skills as valuable knowledge and credibility to help sell yourself to future lenders when the time comes for you to move up. From reading your article, it can pay nice dividends right now, for anyone at any stage, to apply these repositioning concepts as you described so well here when working with a SFR hosuing model, whether you are starting out or looking down the road into going big like Gino who’s story is quite inspiring.

  10. Ben Leybovich

    Gino – you know I like you, right? I mean I do. We get along! And this is a good article, but…

    Hyperbolic Discounting is hogwash relative to finance. Of course I’ll take $100 in 2 weeks verses $500 in 18 months. The IRR says so, not me.

    This is why we have certain amount of real estate to underwrite certain amount of income. But we also have other businesses with much higher VOM 🙂

  11. Eric Waterman

    Hi everyone, I know this was article was posted awhile ago but I wanted to get some more experienced opinions. I’m looking at an 8 unit property in a C class neighborhood. I understand that 7 of 8 are vacant at this time…how would you price this property if there is very little to no income? There are no comparable sales in this area…for a property of this type. It is in a single family zoned neighborhood. I asked the township about it and they said this building was built before that rezoning took place and is grandfathered in. I just can’t add units to it.

      • Eric Waterman

        @gino barbaro

        Just toured the property today, going to need some significant renovation, which I guess is subjective. I’m thinking in the $120-140k range. There’s a ton of deferred maintenance. Owner is 76 and in poor health…his granddaughter is managing the property as a favor. So it has been neglected for quite some time. I have already talked to some commercial lending brokers regarding bridge loan options to get in, fix, stabilize and refi. There aren’t many comparable but the closest I could find was a 5 unit mixed use building 5 minutes away. It recently sold for $150k. It was in similar condition, I toured it last year but walked because it was in a really rough area. The current property is in a better neighborhood. To my knowledge I’m the only investor interested. That’s not to say that could change tomorrow. But there’s not currently a line of investors placing bids. Market caps for properties selling in this condition have been selling around 15 cap according to a local appraiser I had lunch with today. He showed me the analysis. Those properties were in rough condition in c- to d neighborhoods, but were close to or fully occupied. The property I’m looking at is in a c neighborhood. This one has a high vacancy. It’s the worst looking property on the block.

        • Jeff O'Neal on

          Eric – How did your experience turn out? I’m looking at a similar property that is in the midst of a re-positioning (only 50% occupancy right now). The asking price reflects prevailing cap rates, though the NOI currently isn’t there to justify the price. Just wanted to see how you ultimately made an offer, and if so, how you arrived at the offer price. Thanks!

  12. Jeff O'Neal on

    Eric – How did your experience turn out? I’m looking at a similar property that is in the midst of a re-positioning (only 50% occupancy right now). The asking price reflects prevailing cap rates, though the NOI currently isn’t there to justify the price. Just wanted to see how you ultimately made an offer, and if so, how you arrived at the offer price. Thanks!

  13. Eric Waterman

    @jeff O’Neal, sorry for taking awhile to respond. This actually a bit of a long story. I’m going to write a blog post about it on BP. I wish I could say it will be about my triumphant victory and that I got the property…but I didn’t. Lost in a bidding war.

  14. Aaron Hall

    I’m late to posting, but this was a great article for me to read. Just bought my first multi family with my business partner this month and looking to purchase more. I need to have a thorough understanding of analyzing future deals. Thank you!

  15. Bryan Krinzman


    Excellent article and thank you for posting. Quick question to you or anyone else that happens to read this. I found a multifamily deal that calculated the NOI off the potential income from the property, not what was actually collected to come up with a sales price number. Just to confirm, you would take the NOI of what was actually collected in rent, subtract operating expenses and then divide by the cap rate to get the sales price, correct? This is a 4 unit property that has had 3 units rented in the past but the 4th was lived in by the owner. They are still trying to rent the 4th unit now. Rents would be $1100 per unit.

    Thank you,


    • Gino Barbaro

      Problem is using cap rates with smaller properties. Small properties tend to trade more on the comp approach. They are probably going to analyze with assuming all 4 units rented. One of the keys is can you raise those rents?

  16. Steven Bowman

    Looking at a 24 unit (4 buildings) and I just feel like I am missing something because I have ran all the numbers and the apartments have been on the market for a year now. So here is the run down on the numbers I could put together please let me know what I’m missing.

    Rent 450 each 129,600
    Property taxes -15000
    Insurance -8000
    Maintenance 100 per unit per month 28,800
    Net total 77,800
    Asking price 880,000

    Also I have been told that average unit rents for 625 each per month. These apartments are not in the best area and are not in the best shape. D grade for sure but to me it looks like the return is there or I am missing something. Thanks for your input and advice.

  17. Gino Barbaro

    you are missing various expenses, such as a management fee, contract services (garbage, pest, etc) and utilities.

    Expenses are under reported, which would reduce your NOI.
    Property is priced at an 8.8 cap, which is good, but once real expenses are added in, that cap rate will probably drop to around 6.
    I would recommend to go and find a mentor who can walk you through underwriting and due diligence. It can be very challenging on one of your first acquisitions.


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