With a few numbers can I analyze a multifamily deal

7 Replies

I am looking for multifamily commercial property, of 12 units or more. I found listings basically give limited information about the property, such as a listing in Pennsylvania, 16 unit for 1,600,000 the ad proceeds to it for me that the property has a 7% cap rate, with an NOI of 181,800, at 99% occupancy. From this information could I quickly analyze whether this is a good deal or something that I should pass on? I fully intend to acquire with the realtor additional information about expenses and taxes that rent rolls etc. etc. but I was just wondering if I look at this number or these numbers would I be able to tell if I'm wasting my time.

Hey William!

I am a newbie at real estate, so take my post with a grain of salt, but I have studied it for years now and I may have some knowledge on how to analyze this deal. When I first read this i saw the 16 units for 1.6 mil. This is $100,000 per unit, and for a multi-family I believe this is really high. In some markets you can get a 4-plex at $150,000 and have $37,500 per unit. But this is not a huge issue, because it's all about the returns right? 

The NOI is $181,800 per year or $15150 per month. Since you do not have the details on the property yet, lets assume we use the 50% rule. If you are unfamiliar with the 50% rule it is basically stating that 50% of your monthly NOI goes to utilities, maintenance, cap ex, and so on. Then you take that number and subtract your mortgage payment from it. Lets play with numbers here and say you got an 80% LTV, so you need to find out how to get $320,000 up front. Lets say you get a 30 year flat rate loan at 9%, this interest is just an arbitrary number, but commercial loans are more expensive than residential. That would come out to be about $10,299.17 per month. 50% of the monthly NOI is $7575, subtract the loan and you get -$2724.17.

The GRM (gross rent multiplier) is 8. The cap rate is 7% you stated, and this varies from market to market. You have to either talk to a commercial broker, or research your market to see what the average values of these numbers are. They are also used with comparable sales, so you can also ask the commercial broker to pull up some comps for you with these numbers and see what they sold for.

So in my opinion if you know the GRM and cap rate for your area, you will be able to do a better comparison to see what is a better deal in your area.

It seems the like price is so high because of the 99% occupancy, which is really good and its a safe place you put your money in my opinion if you are just getting started and want to ease into multifamily investing, but these numbers would most likely not work out. Of course you would have to get the actual rent roll/pro forma to see if they are true, but this is how I would analyze the deal at first sight. 

Again, take this with a grain of salt as I have not done a deal yet, but only researched!

Have a great day and I wish you luck on your future endeavors!

Hey - the red flag right away is that the listing appears to confuse effective rents with net operating income.  It's easier to break it down on a per-unit basis...basically $100k per unit with rents of $947 per month.  

Using the 7% cap, it's saying about 38% of the rents go to pay expenses.  That may be accurate purely from a recent cash outflow perspective, but additionally you need to accrue an estimate for the lumpy vacancy, repair and capex expenses that are inevitable in the long run.  

Doesn't look like a good deal.

@Kyle A

Hi Kyle, thank you for your informative response. What they say is true , you learn by doing, now with some examples provided, I have a stronger sense of how to make  use the information provided in a listing. Going forward I  plan to practice  analyzing a listings at least once a night, so the process become second nature.

There are several terms that I don't know where they fit in the process i.e. GRM, IRR. Cap rate, for example You mentioned a GRM at 8, what does that mean and how do you calculate that number.

I totally agree, I don't need to start  with a project of this size,  $1.6 Mill Is way beyond my capability, and frankly I did not believe it was a great deal from the start.

William

@Jordan T

Jordan, thanks for your response.

I agree it's pretty simple when you break the big numbers down to the smaller manageable sizes and make assumptions based on industry standards i.e. 50% rule loan-to-value 80% etc. (However I don't understand how you relate 7% to 38% of NOI).

I expect to make my first multifamily commercial deal next few months, by practicing with these numbers and formulas, i will have the confidence to know my numbers are correct and if the deal is great,  good or bad.

thanks again - William

There are a lot of different names involved in either residential or commercial real estate. Most of the one's you've mentioned google gives good examples on. Especially the math is fun one that popped up as you use the NPV-Net Present Value to get your IRR- the internal rate of return.

At any rate you say the purchase price is $1,600,000 for 16 units which is $1m per unit-the NOI is $181,000/12=$15,083 per month income after all expenses except these here.

The following are not operating expenses: principal and interest, capital expenditures, depreciation, income taxes, and amortization of loan points.

Generally, most loans are amortized over 30 years due in whatever terms you get so you take $1,600,000/360=$4,444+ interest, and the others mentioned above. So $15,083-$4,444=$10,639 if you qualify for a 5% interest rate that is $800,000/360=$2,222 so then you subtract that from the $10,639-$2222=$8417 per month net income before taxes or the capital expenditures, depreciation. Which with a good CPA as some that are on here advising you never know unless you ask :) depends on how much you think you need to make per month out of it...It's a close one. but it works out to about $101,004 per year but the full projection will probably be necessary. Those are just the basics to give you an idea of how to analyze a deal in my book :) Good Luck :)

@William G.  The listing says the property has a 7% cap rate.  And it also says rents are $181,800.  7% of $1.6mm is $112k.  If you take 38% of expenses out of $181,800, you get the projected operating income of $112k.

Also it's very very important you get the rent rolls and make sure they can show you proof of rent deposit and they have it rented.  It may be occupied but is everyone paying rent?

If the owner doesn't want to provide it or tries to skim away from that then walk away.  Anyone that can't is definitely covering something up.

There were a few older podcasts on this that go into more detail.

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