If you’ve been around the proverbial BiggerPockets block a time or two, you’re aware of the fact that commercial multi-family properties are valued differently than single-family homes.<\/p>\n
Whereas a single-family home is valued based on the comparable properties (a.k.a “comps”) around it, commercial multi-family properties are valued based on the income that they produce.<\/p>\n
This is done by applying a capitalization rate (a.k.a “cap rate”) to the Net Operating Income to determine its value.<\/p>\n
Say you find a property.<\/p>\n
According to the seller’s pro forma, it nets\u00a0$50,000\/yr. You then do a bit of research and find that it is located within a market where the cap rate is 8%. Since you know the market cap rate and you know the NOI, you can derive the property value based on the current market.<\/p>\n
Cap Rate = NOI \/ Market Value<\/em><\/strong><\/p>\n 0.08 = $50,000 \/ Market Value<\/em><\/strong><\/p>\n Market Value = $625,000<\/em><\/strong><\/p>\n So let’s assume that you put in an offer for the property at $600,000 and it is accepted. Congratulations! You just got yourself a steal!<\/p>\n Until, of course, you realize that your NOI was off.<\/p>\n In fact, the NOI is actually only $45,000. But that’s not too bad, right? Just a $5,000 difference.<\/p>\n Well, lets run that math again.<\/p>\n Cap Rate = NOI \/ Market Value<\/em><\/strong><\/p>\n 0.08 = $45,000 \/ Market Value<\/em><\/strong><\/p>\n Market Value = $562,500<\/em><\/strong><\/p>\n Uh oh.<\/p>\n Related:<\/strong> Interview With a Bi-Coastal Investor: Why I Purchased My First Multifamily Property Thousands of Miles Away<\/a><\/em><\/p>\n I’m not a seasoned multi-family investor like many of the people on BiggerPockets.<\/p>\n So when I decided to make the leap into commercial property, I couldn’t exactly refer to my own Excel spreadsheets and experience in order to know how much everything cost.<\/p>\n What are typical vacancies for a multi in my city?<\/em><\/p>\n How much are other owners spending for repairs every year?<\/em><\/p>\n What does electricity typically cost for common areas?<\/em><\/p>\n I had no idea.<\/p>\n Commercial real estate is a completely different game from single-family homes. Therefore, I wanted to make sure that I had all of my ducks in a row before I put an offer on anything.<\/p>\n I learned about The Institute of Real Estate Management<\/a> in\u00a0Steve Berges’ book The Complete Guide to Buying and Selling Apartment Buildings<\/a><\/em>.\u00a0This was a huge find and really helped me get a grasp on determining NOI.<\/p>\n The IREM Income\/Expense Analysis program has been around for 59 years now. It started out as a brief survey of 200 apartment complexes and has evolved into a massive undertaking of approximately 10,000 properties throughout the United States.<\/p>\n After this data is acquired, 1,000 pages of analysis are published in 5 different volumes.<\/p>\n Although these reports start at a not-so-cheap $145, I couldn’t be more happy that I bought it.<\/p>\n As we saw in the above example, even a small error in the calculation of NOI can drastically change the value based on cap rates.<\/p>\n So how awesome would it be if you could see a list of real world values for apartment complexes in your city?<\/p>\n Enter IREM.<\/p>\n The income\/expense items in the report are listed based off of the HUD Chart of Accounts in order to ensure consistency.\u00a0Values are shown in the following three ways.<\/p>\n Here is a sampling of some of the line items listed on the report.<\/p>\n Is this property a good deal? Where can we improve the value? Can we raise rents? Can we decrease expenses? Most importantly, will the local market support these changes? <\/em><\/p>\n Answers to many of these questions can be found within the income\/expense analysis report. It’s kind of like having a mentor who lets you peak inside his books from time to time.<\/p>\nInstitute of Real Estate Management (IREM)<\/h2>\n
IREM Income\/Expense Report<\/h2>\n
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How Do I Use the Data?<\/h2>\n
1. Analysis<\/h3>\n