How to determine apartment values

Question

I feel like I can accurately evaluate BRRRR or flip projects.  How do you accurately value an apartment complex.  I'm looking at a 34 unit in OKC with a cap rate of 8%.  asking price is 1.8,000,000.  Evenly split between 2/1 & 1/1 units with only a single 3 bed.  I'm not actually going to buy this, I just have no idea to even determine if it constitutes any kind of a good deal.  Can't ever buy an apartment if I don't know what I'm doing.  Thanks in advance.

Charles Carillo · Answer

@Mike Crouse

With commercial multifamily (5+ units) value is determined by the NOI. Yes, when you look in a broker's packet they will have comps of other complexes that have sold; but really you are determining the value by the NOI and cap rate. If you are planning on doing a value-add business plan, you will need to start comparing the rent comps of similar units nearby as well.

Levi T. · Answer

Cap rate on the NOI is more or less the go-to for first glance, but you need to really take a hard look at the income report, as the owner or manager may not include everything... Like insurance, or taxes, because the "owner" pays it, and not the management company, so it's missing from the income report. Rent roll inflation is common, as well as assumed loan rates by seller, or whatever they cooked up to come up with their advertised cap rate, so pay attention to the little details, and assume nothing. I personally go for cashflow as is, with value add. It's the same way you would buy a BRRRR, but scale it out per unit. It is very common for multi investors to do 30% or 60% of the unit remodels, then sell before completing the last few units. Tis creates a value add opportunity for the next buyer. I bake offers based off the cashflow and my current loan terms. As I do private non-recourse loans, I need 65% of appraisal value, plus room for the bridge loan to make improvements based into that. In your example you have a 1.8 million purchase price, plus closing cost (assume 10% add), you have 34 units, and we will say we will sink 12k into each unit, with maybe 2k of that going t external improvements. That mean's we have a 408k construction cost, and a 180k closing cost with loan org fees, etc, for a total added cost of 588k, which brings the deal to around $2,388,000 to close and improve, but you don't want to spend that type of cash, so frankly I would offer at 1.5 million as that is 65% of that, which you will likely end up somewhere between 1.5m - 1.8m. You can get into other details to create value add once you have more experience, such as getting lower insurance, or management cost, etc. It's more about gaining control of the asset. For example, maybe the owner will only take 1.8m, but you know it wont work for the bank, or you don't have the means to make that happen, so you instead offer a Master Least Option (MLO), and you use the MLO deposit to improve the property along with the cashflow, then once you get it up to the new value, you get it appraised, and exercise your option to purchase it at 1.8m or whatever.

Rhett Tullis · Answer

look at all the details very closely and assume about 50% of it is wrong.  I have never seen any substantial multi family change hands that did not have alot of inaccuracy in rent collections, rental rates or needed maintenance.  Most of the time it is either due to failures by the current owner or poor record keeping or both.  Also be wary if they cant get you the info/details you need.

How to determine apartment values

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