I am getting lost in NOI and Cap rates. What is the formula or points of reference to calculate investing in a multi-family?
Can I work backwards from a projected rent? Lets say each door rented for $700. It would generate $2,100 per month. Tentatively estimate (for convenience) the 50% rule for expenses. Plus mortgage. Im left with cashflow. Obviously, how much I throw down for deposit and rehab would allow me to calculate the ROI.
I would like to BRRRR but am aware that being a multi-family it would be appraised by either market value or income.
Can someone slap some stone cold formulas or knowledge down please?
It can be confusing for sure. A lot of folks on this site are wicked smart and do well with complicated formulas.
My first "go to" formula is: offer price <= (potential rent) x (50) - (rehab cost)
For example: offer price <= $2100x50 - $5000 or $100,000
You can move your "50" number up a bit if you want. I've purchased them as high as 82, but I like to stick with 50.
Of course lots of other factors to consider (taxes, insurance, vacancy, appreciation potential, maint).
Howdy @Jonny Morris
First it important to understand what you mean when you say “Multi family “.
There are two basic terms when describing rental properties. Residential - 1 - 4 unit properties (SFR, Duplex, Triplex, 4 Plex) or Commercial - 5 plus units. Apartments!
There is a difference in how there Value is determined and how they are financed. Residential uses Comps (Comparable Sells) to determine the value. Commercial will use NOI and Cap Rate. With Residential properties you can get conventional Freddie/Fannie financing amortization over 30 years. Commercial properties will have shorter terms, higher interest rates, and balloon payments.
Thanks Chris. What does the 50 represent? If I used that it comes out about 25k less than the county tax assessment.
My mistake sorry (long day)!
Thank you for clarifying. It’s residential ...triplex
50 is just a ratio. Monthly rent to purchase price. If a place will rent for $1000 per month, I prefer to have less than $50k in it after rehab. Lots of other factors too (mentioned already).
This becomes more difficult to find if you have a lot of money to invest, but if you're starting out, you can pick and choose a little more and get the deal you want.
This is how I approach BRRRR properties.
Quick analysis: Property must meet the 1% rule (rent to asking price ratio). $100K = $1,000 Rental Income. It must Cash Flow a minimum of $100 per unit/m using 50% rule. If it meets both it’s worth taking a closer look.
I prefer the current rent to be below market rates. That way I can raise them after the Rehab.
The most important part of the process is establishing a solid ARV based on recently sold comps. I then work backwards from there to determine my Maximum Allowable Offer (MAO). Here's the formula:
ARV x 70% - Rehab Estimate - Closing Costs - Holding Costs = MAO
I use 70% to determine my All-in cost Target. Most Refinance lenders provide a loan amount that is 70% - 80% LTV. Typically it's 75% . I want to try and keep my costs under that amount. 70% gives me a little buffer encase my Rehab goes over budget or the appraisal comes in lower than expected.
Then it’s just a matter of subtracting all my costs to figure out what my max offer can be. Example:
$100,000 ARV x 70% = $70,000 All-in
- $20,000 Rehab
- $5,000 Closing (Acquisition Closing, HML Points, Refinance Fees)
- $5,000 Holding
= $40,000 MAO
Holding costs include (but not limited to) loan payments, insurance, taxes, utilities, HOA fees, etc., that occurs during the Rehab period and up until the property is fully rented.
I get a lot of “NO’s”. But, when I do get a Yes it’s a good deal.
Wow - what a concise and helpful breakdown! Very digestible for me. That’s basically the theory I had running around my head but then locking down a MAO is where I was flexing. Necessary for all parties concerned!
Thanks again John...excited to apply this today!