Multi-Family Performance Questions
Running numbers on a small multi-family and have general figures for most line items but looking for thoughts/strategies on targeting value after improvements have been made and performance has been improved. How do you ballpark value/cap rate after?
If you know your target rents in the end you can run comps against sales of similar properties as well as against current rentals who have the target rent you're shooting for.
You can then assess the properties that are similar to what your goals are. This should give you an idea of how much rehab/the quality of rehab you have to do to get where you need to be.
Once thats established you can run your numbers knowing what threshold you have to get the property to for you to attain the numbers you want.
@Ean Savoy technically since it is a small MF property you should run it against good comps. If you want to do the exercise of evaluating it like a commercial property, total up after-renovate rents, subtract out average vacancy, then all your line expenses, for your NOI. Determine what the prevailing market cap is in your submarket, then divide the NOI by that Cap. NOI ÷ Cap rate = Value. Cross reference that against your comps analysis.
Thanks Rick! It’s a 10 unit so I’m working through the commercial exercise. I guess my specific question is what determines the cap rate in the area? Is it like class properties that are for sale? Recently sold? Would local commercial brokers have have these rates?
@Tyler Fontaine Thanks! Will run through that approach.
Quote from @Ean Savoy:
Running numbers on a small multi-family and have general figures for most line items but looking for thoughts/strategies on targeting value after improvements have been made and performance has been improved. How do you ballpark value/cap rate after?
I’ve done rehabs in the 10-20 unit range and one thing I didn’t expect is the time and expense to change the culture of the building. It’s not an issue for class A buildings/neighborhoods, but is challenging in Cs and Ds. Good tenants don’t want to live with bad tenants so, if you’re doing this type of project, you might want to assume that you’re first units will sit vacant a long time until you find the kind of tenant you want and that you will need to keeps rents low until you have several units with good tenants.