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Multifamily Deal Analysis: How To Value A Multifamily Property

Chiagozie Fawole
7 min read
Multifamily Deal Analysis: How To Value A Multifamily Property

Multifamily property investing is attracting ever more interest, leading to increased demand. But many investors aren’t sure how to value multifamily property. How do you quickly assess deals to see if they’re worth making an offer on, and how much do you bid?

If you know how to value a multifamily property and keenly assess the deal for cash flow and value-add opportunities, you can position yourself to find deals that help you and other investors who may not have the time or interest to value the property themselves. Let’s explore what multifamily properties are and how to value them so you can level up your investing strategy.

What Are Multifamily Properties?

Multifamily properties include apartment buildings, duplexes, townhouses, and condo buildings. It is any property in a neighborhood with more than one housing unit.

Increasing numbers of stock market and single-family real estate investors want to step up to multifamily property investing. A significant step in this process is to swiftly sift through property leads to determine how much they’re worth and which ones are worth pursuing. This is done by performing a multifamily deal analysis.

Through your deal analysis, you’ll learn how to value a multifamily property because it takes you through all the numbers you need to know to estimate the income you’ll make on the property. A deal with the right numbers will look very attractive to investors.

Ways to Value a Multifamily Property

You can use these steps if you want to know how to value multifamily property to understand whether you’re getting a good deal:

1. Determine net operating income (NOI)

The net operating income levels the playing field for all comers, telling you how much income you can expect after you’ve handled the day-to-day financial demands of the property. You can use the numbers provided by the broker for preliminary screening, but you should ideally ask for and then research the numbers. You can then do your own calculations by using this formula:

NOI = total income – total operating expenses

The total Income includes:

  • Total rent.
  • Total fees include pet fees, late fees, and coin-op laundry.

The total operating expenses will include:

  • Vacancy: 5%-10% of the rent.
  • Taxes: city and county.
  • Insurance: from an insurance broker.
  • Maintenance: 3%-5% for snow removal, lawn mowing, and common areas.
  • Management: ask local property managers for rates.
  • Utilities: call the utility companies for rates.
  • Repairs: 3%-5%.
  • Professional fees: for services from lawyers, electricians, or advertising agencies.

When you subtract these amounts, you’ll have your NOI. 

2. Calculate cap rates

Capitalization rates, or cap rates, are a fancy way of saying the expected rate of return based on the income in real estate. Knowing the cap rate when deciding which property to invest in can be helpful.

Cap rates have an inverse relationship with market value. When cap rates compress, the value increases — and vice versa. It’s fantastic when you own property and cap rates are falling, but just the opposite when you are trying to invest. The formula for calculating cap rates is:

NOI / value = cap rate

For example, if the property has an NOI of $50,000 and is listed for $500,000, then the cap rate would be:

 $50,000 / $500,000 = 10

It’s a simple equation that can tell you a lot about the multifamily property you’re interested in.

3. Do due diligence

When you’re looking at hundreds of deals, quick analyses can save you a tremendous amount of time. Do your due diligence for each multifamily property that you’re serious about investing in. This includes obtaining bank statements, rent rolls, unit inspections, and so on. All the documentation and hard facts will either confirm your assumptions and verify the numbers, or they won’t.

4. Find the right location

Where your multifamily property deal is located will play into its overall value, especially long term. Make sure to research the neighborhood around the building as well as the city it’s in to understand its potential. The more you know about the area, the better you can determine whether the value of the property will increase or decrease over time.

Look into an area’s crime rate, demographic makeup, and economic stability. These are all good indicators of where the location is headed in terms of whether people will want to live there.

5. Perform a comparable search

Check out what rents are for similar units to the multifamily property you’re considering as an investment. By performing a comparable search, you’ll get an idea of your rental income. It will also give you an idea of the price similar multifamily properties are selling for nearby. You have to take into consideration the age and condition of comparable properties when doing your search.

With the numbers for comparable properties in hand, you can look at the numbers for your potential investment and see if they make sense. If you have to do work on the property, use the comps to see which units are experiencing higher occupancy. Try to choose a multifamily property that will attract the most renters.

6. Go see the property

The last thing you can do is go see the property for yourself. You’ll be able to drive through the neighborhood and see how it is with your own eyes. Walk through the grounds of the building, look at maintenance areas, explore common spaces, and, if you can, go into the units themselves. As you walk around, you need to ask yourself what makes the property unique and what you will need to do to improve it.

If the property looks good and you think it’s a deal you want to make, you can move forward with it. On the other hand, if you don’t like it or something doesn’t work out on paper, don’t be afraid to leave the deal. Either way, you can say that you know how to value multifamily property the right way.

Benefits of Investing in Multifamily Real Estate

There’s more demand for multifamily rental properties because of the benefits for investors, such as:

  1. Providing steady cash flow: Apartments generate monthly income, similar to dividends paid by stocks. The rental income rolls in every month.
  2. Offering tax advantages: The government realizes it does not have the ability to deliver affordable housing to every citizen who needs it. So it offers tax benefits to real estate investors trying to stimulate the private sector by stepping in and filling the void.
  3. Growing a portfolio quickly: Multifamily properties can grow your real estate investment portfolio very quickly because you’re gaining income for many units at once, and the buildings are large assets with high values.
  4. Building a portfolio in a day: Purchasing a multifamily property can build your portfolio in one day because it’s such a large deal with the potential to earn a huge income.
  5. Economy of scale: This is a huge advantage when trying to scale your business. It’s much easier to collect rent from 30 tenants in an apartment building than to collect from multiple single-family homes. Having more units under one roof is easier and more cost-effective.

Making Your Investment More Profitable

Part of knowing how to value multifamily property includes understanding what it takes to make your investment more profitable. These tips can help you get the most profit out of your multifamily property:

1. Calculate the cash flow

Cash flow is specific to you, the investor. When you calculate the cash flow for your multifamily property, consider the mortgage terms and your inclination to plan and save for future capital expenditures (CapEx). This is what you truly “take home” as profit from the investment. Here’s the equation:

Cash flow = NOI – (mortgage payment + reserves for CapEx)

How much you assign to CapEx reserves is how much you plan to save for big expenses. Think of what big-ticket items you may need and how soon you may need to replace them.

Say the roof is expected to last another 15 years and will cost an estimated $15,000 to replace. You would target saving about $1,000 per year for 15 years. Some suggest using a quick and dirty $250 per unit per year savings plan for larger multifamily properties.

How much cash flow is enough? Some investors say the goal is cash flow that gives at least double-digit cash-on-cash returns. You can use this formula:

Cash-on-cash return = cash flow / cash invested * 100

By calculating the cash flow, you can see how profitable the multifamily property might be and determine whether it’s a good deal.

2. Find opportunities to raise the value

Unlike a single-family home, the value of a multifamily property is based on its financial operations.

Value = NOI / capitalization rate

The capitalization rate is a multiplier that indicates how much the market is willing to pay for certain returns in a given area and a given property class. As with single-family home comps, you can ask your broker for this number.

When you have the going cap rate in the area, you can determine how much a change in the NOI of a property will change its value. Your goal is to raise the NOI.

How do you raise the net operating income? Consider these:

  1. Increase income: raise rents; charge additional fees such as late fees, pet fees, etc.; install coin-operated washers and dryers; offer paid storage; add cell towers, etc.
  2. Decrease expenses: fix leaking faucets and pipes, install energy-efficient appliances and windows, charge back utilities, etc.

While analyzing the deal, identify clear ways to make these changes. Research your competition and determine if you would need to upgrade the units to raise the rent. Factor any rehab costs into your purchase price.

3. Determine your purchase price

Determine your purchase price based on the current NOI of the property and the going cap rate. Don’t overpay today for unrealized potential. If, for example, you determine that the current NOI of a property is $40,000 and the going cap rate in the area is 12%, your purchase price should be no more than $333,000.

Purchase price = NOI / cap rate

The less you pay for a property, the higher your profits. So knowing the highest amount you want to pay for a property before you negotiate is key.

How to Improve the Value of Your Multifamily Property

There are a few ways to make your investment more profitable after you do your due diligence and close the contract, which might include:

  • Make sure the property is in ideal condition by increasing the quality of the tenant base and offering amenities such as a fitness center or clubhouse.
  • Invest in the multifamily property by adding upscale touches such as two-tone paint and upgraded kitchen floors
  • Evaluate rent prices and consider renovating a property to allow for an increase in rent.
  • Improve the property’s ROI by instituting a Ratio Utility Billing System (RUBS) or changing the zoning to a more favorable use.
  • Generate new sources of revenue, such as laundry fees, pet fees, late fees, application fees, and storage fees.

All of the value-adds listed above must focus on increasing revenue or decreasing expenses. If you decide to install granite countertops but this upgrade fails to increase revenue, this is not 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.

This is the beauty of knowing how to value multifamily property. You can increase the value of your asset by employing sound management principles to increase the NOI, thereby increasing the value.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.