Multi-Family Property Analysis

8 Replies

What are the crucial factors to look for when analyzing a multifamily?  How important is the time it will take to pay off the property? I recently started including the cap rate in my analyses to determine if the property could be a good deal.  I just want to make sure there are no loop holes in my analysis.

I assume you are talking about larger MFs. I only have duplexes. I rely on the Rental Calculator on BP to tell me if something is a good deal. When I'm looking at things, I look at the cash flow and cash on cash ROI. As for paying it off, I am a believer in the faster the better. :-)

If this doesn't help, maybe me bumping this thread up will encourage someone wiser to answer. 

Good luck!

Hi Jody, thank you for the response, this was very helpful. I just don't want to get into a deal and then forget I didn't analyze an important factor. Seems like Cash on Cash ROI and Cash-flow are most important.

I'm curious as to why you only "recently started including the cap rate in [your] analyses", as if it were an afterthought?

The cap rate is the single most important number to consider when analyzing a multifamily property. The cap rate allows you to measure and compare the property's performance (and potential performance) as an investment compared to other properties, and compared to dissimilar investment opportunities (such as stocks, bonds, precious metals, etc).

The cap rate is also the primary determinant of a rental property's value. Want to raise the value? Raise the cap rate - because that's what multifamily buyers care about when analyzing/valuing a deal and comparing it to other options.

Cash on cash return is specific to you and the amount of cash you have in the deal. Different types of financing and down payment amounts will change this number - but that is primarily determined by the amount of your specific cash outlay (which could be anywhere from 0% to 100% of the purchase price), not the property's performance.

Similarly, monthly cash flow really only matters as it relates to the total acquisition cost. $500 NOI every month would be awesome on a $50k investment (that's a 12-cap!), but it would be terrible on a $500k property (that's a 1.2% cap). In other words, the cap rate is what really matters....not the cash flow. 

The cash flow (NOI) is just the numerator in the equation, you have to finish the math.

As far as the time to payoff the property, this is generally measured by calculating the Gross Rent Multiplier. Lower (quicker) is obviously better, but really only useful when comparing one property to another. It's one factor to consider, but the cap rate is king.

@Jeff Copeland , thank you for the in depth explanation, makes perfect sense and now I know the importance of the cap rate. I only started considering the cap in my analyses now because I just started to look at multi-family properties with 3+ units. Prior was SFH and duplexes, but my scope has changed.

The property I am currently looking at is a 3 unit and listed at an 8% cap rate. With everything considered, the numbers work out to be pretty good in my opinion.

Thank you so much for the feedback and knowledge!

@Kyle Brown - Be wary of "advertised" cap rates. Listing agents are notorious for leaving out big expenses like property management, utilities, repairs, vacancy, etc. when advertising a property.

A well-managed property typically operates a little below 50% expenses. So $1k/mo in gross rental income should produce about $500/mo NOI ($6k/yr).

If you see a property with gross rental income of $1k/mo, but expenses of $200/mo (or whatever), you may want to dig a little deeper into their P&L / Income statement to see if anything was left out.

@Jeff Copeland , thanks for all that information!  I knew even less about multi-families than I realized!  Luckily, I'm not planning to tread there, so it's all good for me.  ;-)  

But quick, Jeff!  POST SOMETHING!  You're at 666 posts!!!  lol

@Kyle Brown

A different perspective...

While 3-unit properties are multifamily, they are still considered residential properties. Cap rates are of limited use in residential properties and are more relevant in analyzing 5+ unit properties. When doing any kind of valuation analysis on residential, multifamily properties (1 to 4 units), cap rates are irrelevant as the valuation is normally based on recent sales comparables as opposed to cap rate comparables.

The approach I take in analyzing a property is the same as when I analyze any other investments and that is to look at it in its entirety, even if it means I would have to assume the length of time I plan to hold the investment, and the proceeds I would receive when I exit (i.e .at sale). The metrics that are my usual suspects are IRR, CoC, DSC, LTV.

I use IRR to see if I'm even interested in the deal (i.e. the deal is highest and best use of my capital compared to other investment opportunities that are available to me at the time). Once I'm interested I then use CoC, DSC, LTV to stress test the deal under various what if scenarios. I want to know what circumstances would put me in trouble with cash flow (CoC), with my ability to make loan payments (DSC), and with going underwater with the lender (LTV).

Notice that cap rate is nowhere in the analysis, but know that you need to understand cap rate and how people are using it. They use it to entice and advertise, it's a marketing tool. It also establishes rapport with brokers and other investors at meetups and gatherings because when you mention cap rate somehow people know you're in the biz :-). I recommend you do a search on "cap rate" right here on BP, you would discover some level of confusion surrounding cap rate.

Cheers... Immanuel

@Immanuel Sibero thank you for explaining this from a different perspective, looking at the whole picture of the analysis and then picking out the red flags that appear is a great way to determine if the deal is feasible or not.

I am picturing the four square model that consists of the income, expenses, cashflow, and cash on cash ROI.

I want to get to know as much as I can about the analysis step before I get too involved and purchase multi families.

Thank you all for the feedback!

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