Valuing a Multifamily Property

[Evan Cruz]

   What is the most effective way to analyze a multifamily  property and what needs to be accounted for when valuing a multifamily  property? Does the intrinsic value need to be the after repair value as suggested by Brandon Turner or is there some other value that should be considered the intrinsic value of the property?

[Sam Amir]

Hey Evan, the most effective way to analyze a property is by taking a look at its NOI, or net operating income. We can use that to determine the market valuation. It's a simple equation based on gross income, expenses and the cap rate of the area. Notice that I did not include any debt (mortgage) you have on the property. Income is based on rents and other income sources like laundry or garages. Typical expenses of a property are: taxes, utilities, maintenance expenses, capital expenditures (big ticket items like roof, boiler replacement, etc.) and insurance. The cap rate, or capitalization rate, is basically the rate of return on an investment property. This is determined by local market forces, so just ask your realtor to give you typical cap rates of a certain zip code. The realtor will look through listings on the MLS and determine a cap rate based on buildings that have sold around you. Be wary though because cap rates can be exaggerated.

Also, you always buy the property on it's current condition. Meaning the income it's producing right NOW, not tomorrow or 5 years from now. 

Now that you have everything you need, valuation for a MF would working something like this:

Gross Income (from rents, laundry, garages, etc.): $50k/yr

Expenses: $25k/yr

Cap Rate: 8%

Net Operating Income (NOI):  Gross Income - Expenses

Market Valuation: (Gross Income - Expenses) / Cap Rate = $50k - $25k/.08 = $312.5k

So that's what you would BUY the property for. For a general rule of thumb, this works pretty well. The selling price should be close to this number.

Your question seems to indicate you're trying to rehab or add value. You can determine the new valuation (ARV) by adjusting the income and expense part of the equation. You've either raised rents by rehabbing the property or putting rents to market rent, or, you've cut down expenses somehow.

Never buy the property on the ARV price. Some owners will bump up the price of a building if they know value can be added, but this shouldn't be much.

Hope that helps, good luck!