Commercial Real Estate

The Method We Use to Quickly Evaluate Multifamily Deals

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Multifamily property investing is attracting more and more interest, leading to increased demand. How do you quickly value deals to see if they’re worth making an offer on, and how do you know how much to bid?

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More and more stock market and single-family rental investors want to step up to multifamily property investing. One of the most significant steps to tackle in this process is swiftly sifting through the property leads to know how much they are worth and to know which are worth pursuing.

Simplicity is Key at the Start

Whether you are browsing the web, having agents and brokers sending you deals, or driving neighborhoods, you can have a lot of potential deals to look at, and little time.

Having a quick gauge for knowing whether to toss it or dig in can help a lot. What information you accumulate and review, as well as what data you have access to, will vary from deal to deal. Personally, I love back-of-the-napkin math. It can save you time in the event the seller is asking way too much—or conversely, in the event it is a steal that you need to get under contract immediately.

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Related: How to Jumpstart Your Investing Career as a Multifamily Deal Finder

For this, you just need to know your:

  • Potential rents
  • Approximate operating expenses
  • Cost of any financing, if you need it

The Formula

Luckily, I have a partner who specializes in all things financial. He’s the one who does the real work in evaluating multifamily deals for our real estate investment firm.

When we speak with a owner, or a broker emails us a deal with limited information, we pull it all into a spreadsheet, which you can find here. Some line items and factors will vary depending on the property location, year built, etc.

Additional items to consider during underwriting include:

  • Taxes
  • Insurance
  • Vacancy rates
  • Repairs and renovations
  • Liens
  • Utilities
  • Asking price
  • Financing
  • Property management costs

One way we’ve found to quickly rule out or spot hot potential deals is by looking at current expenses. As a general rule, a Class C property in a C neighborhood will generally run a 50-55% expense ratio. If an owner tells us he is running at a 25% expense ratio for that type of product, then something is off. Most likely, their books are cooked. Not always, but most likely. Unless everything else makes it a must-have deal, you may just want to move on. On the other hand, we’ve spotted deals where the current expenses are more like 75%. That doesn’t mean it is a bad property. It can mean there is huge room for improvement and a lot of hidden value if you can get it for a good price and boost performance.

To make a quick decision, you’ll be looking at things like cap rate, NOI, and your annual returns for the first year.

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Related: Is Multifamily a Good First Real Estate Investment?

Conclusion

When you are looking at hundreds of deals, quick analysis can save you tremendous time. After running the numbers, we then formulate an offer to present to the seller. Sometimes we’ll begin by submitting a letter of interest (LOI). This really comes into play when you aren’t sure the seller is going to like your offer and you don’t want to do all the extra work unless you can get close to an agreement.

In others cases, we go straight to contract. At that point, we go deep into due diligence and obtain bank statements, rent rolls, conduct inspections, etc. All the documentation and hard facts will hopefully confirm our assumptions and verify the numbers. If you can get all this information beforehand, it’s even better. Just know it can be a lot of work and can cost money, and you might not even get under contract. Many sellers aren’t going to want to share their finances with everyone in the world, unless they are in a serious contract.

How are you evaluating your multifamily investment property opportunities?

Comment below!

Sterling is an multifamily investor specializing in value-add apartments in Indianapolis and other Midwestern markets. With just under a decade of experience in the real estate industry, Sterling w...
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    Cody L. Rental Property Investor from San Diego, Ca
    Replied over 2 years ago
    My formula is even easier. How much am I paying relative to rent roll, and is that a good ratio for the area. An area I really like? I’ll pay up to 100x rent roll War zone? I’ll pay 50x rent roll. In-between area? Somewhere inbetween. I came up with that system after I bought my first investment property by accident. I was looking at two different townhomes to live in. When I selected one, my realtor said if I bought the other her friend would lease it. I asked how much and realized I could lease it for more than my payment (“Whoa! Why doesn’t everyone do this?” I thought). My criteria became simple: If it’s in an area I’d live in, and no more than 100x rent, I can lease it and make money. Fast forward 11 years and over 1000 units, I still use the same quick metric for looking at buildings.
    Ron D.
    Replied over 2 years ago
    Hey Cody L., I like your formula. Question, when you say “rent roll”, do you mean the gross rent roll, no vacancy factor, nothing, and just 100x max off of that…… OR do you factor in a vacancy factor (5%) and get down to the NOI and then 100x max off of that? The 100x max, is off the monthly rent roll, right ? Tx,
    Edward Barnes from Smithfield, Virginia
    Replied over 2 years ago
    So 1% rule for good areas, 2% for bad?
    Deanne Moore Rental Property Investor from Rancho Cucamonga, CA
    Replied over 2 years ago
    Good info. Thank you for sharing this.
    James V. Waldrep
    Replied over 2 years ago
    A quick rule of thumb is gross rent multiplier. You can use either monthly or annual rent roll and divide into the asking price or your offer. You will have a quick answer. You can evaluate the existing rents and your estimated market rents. This should also give you a quick evaluation of the property.
    Alice Lawrence Investor from Brooklyn, New York
    Replied over 2 years ago
    What if rents are below market?
    Alice Lawrence Investor from Brooklyn, New York
    Replied over 2 years ago
    Thanks for the spreadsheet, Sterling!
    Tracey Fergerson Real Estate Agent from Colorado Springs, Colorado
    Replied over 2 years ago
    On the spreadsheet example it shows a $4.2mil asking price, but the offer price is $6.6mil, is this correct?
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 2 years ago
    It was a typo. The information outside of formulas is examples.
    Nathan G. Real Estate Broker from Cody, WY
    Replied over 2 years ago
    There are a variety of ways to evaluate and a number of factors influencing which one is best for the individual. Everyone needs to find a method of valuation that works for their situation and market, then practice it.
    Kurt
    Replied over 2 years ago
    It varies by location. The calculation that works in one area may not work in another area. In California, appreciation is where the majority of money is made. In other areas it may be cash flow that brings in the majority of money. That doesn’t mean those other areas are not a good investment and it doesn’t mean California is not a good investment. You just have to be flexible with your metrics if you want a portfolio of properties in diverse locations.
    Nancy E. Rental Property Investor from Charlotte, NC
    Replied over 2 years ago
    Hello Sterling, Good article and just in time for Multi-family hunting season! I like the short cuts mentioned by Cody and you. We will probably use them to get an idea before moving forward on a property. From Nancy
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 2 years ago
    Glad I could help! Best of luck, Nancy.
    Shakirat Olanrewaju from League City, Texas
    Replied over 2 years ago
    Great article, newbie question: Do you pay a seperate closing cost for each unit in the case of a multi unit with 2 units , one roof, two addresses? For example, two condos sharing same roof with two seperate street numbers? If yes, how do you negotiate lower closing costs. If no, what rules/ laws can I reference to my realtor or mortgage company or title company so they know this should be viewed as one property?
    Micheal Azira
    Replied almost 2 years ago
    Thanks for sharing
    Marylin OShea Real Estate Agent from Annapolis, MD
    Replied over 1 year ago
    Quick question – I’m using your spreadsheet, it’s fantastic. THANK YOU! I see you have a row for other income — what is this for? Coin laundry, that sort of thing?
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 1 year ago
    correct
    Tony Asbille
    Replied over 1 year ago
    Sterling I cannot see the spreadsheet, can you email it too me please. I would love to see it