Investor · Midwest · Member since 2013 · 253 posts · 34 votes
All of our current rentals are single family homes. We want to branch out to multi-family. There aren't many available for sale or recently sold to do the same kind of comp analysis that we've done for single family homes in the past. How do you calculate your purchase price for a multifamily?
One method I have considered is factoring the price by door. So, if we're looking at a 5 unit building with 1 bedroom units compare that to 5 SFH with 1 bedroom, does that make sense?
Another method is purely on rents for the area, so if a 1 bedroom can rent for $1300 and there are 5 units then you can go from there to figure out your max purchase price. Seems like a better method, but the market is so tight right now that people are listing so high (and some paying even higher).
Are you using some sort of cap rate or similar value to help determine any of this? Any additional insight is greatly appreciated!
@Therese V. The value of All commercial real estate (CRE) asset classes is defined by its Net Operating Income (NOI).
NOI is calculated by establishing the gross rental income of any CRE asset and deducting a vacancy allowance adding other income and deducting operating expenses from it.
NOI can be used to establish the value of any CRE asset including a Multifamily property in two ways:
1. Value is defined by dividing NOI by an inferred cap rate: $100,000 NOI / 5.0% cap rate = $2,000,000 value/price.
2. If value or a purchase price is known (stated), the cap rate is determined by dividing the NOI by the price: $100,000 NOI / $2,000,000 = 5.0% cap rate.
Cap rate is one of a number of metrics used to analyze and establish value and performance.
In the cases noted above the cap rate represents the un-levered cash on cash return produced by the property. Un-levered means that no loan has been introduced yet.
So, if a property was purchased for $2M ALL CASH the Buyer’s cash in cash un-levered return is 5.0%.
DM me and I'll send you a short worksheet that covers these items along with capital stack, levered performance and something called debt service coverage ratio DSCR.