How to analyze a multi family deal

Question

Hi, I am looking to put an offer on a multi family building soon (4 units), and was curious if anyone has a good video they can send, or can guide me into figuring out the value of the property.  I know that you have to take the noi and divide it by the cap rate, but is there another way?  I remember hearing that its not always the best way to calculate value.  It will be my first multi family, but not my first property bought, i'm already doing a house hack.  Thanks

Nicholas L. · Answer

@Adrian Lammersdorf-Scioll

you can do all the analysis you want, but if it's already listed on LoopNet:

-it's probably not a good deal

-they probably won't accept less than asking price

Deandre P. · Answer

You should be able to get comparables sold from the MLS.  If you do not have access, you may be able to get a local realtor to pull some comparables for you.  With that being said, I would still suggest valuing based on income, given the cash flow generated from the property is likely your highest concern.  Valuing a 4-plex based on income, most investor would use a GRM(Gross Rent Multiplier) Value/Gross Rental Income= GRM.  You can compare the GRM of the property you are looking to buy to the GRM of comparables and based on the property decide if you should be higher/lower.  Also, I would look at your rate of return and cash on cash return.  So develop an operating proforma to derive your NOI and apply a cap rate that you are comfortable with/rate of return you are expecting.  Then deduct your debt service from you NOI and determine your cash on cash return.  With the rising interest rates, you want to make sure the deal debt services, also that you are making a return that is worth the effort/risk you are putting in the deal.

Taylor L. · Answer

4 Units aren't valued based on NOI & Cap rate, they're valued based on comps. Commercial (5+ units) are valued based on earnings.

Perry Rohan · Answer

Hi Adrian,

Make sure to remember that when doing your financial analysis, include the real estate tax from the estimate you get from the Tax Authority on what your real estate taxes will be, in light of the purchase price. So many buyers forget that the tax reported by the seller is not the tax you will pay. Your tax will be based on the purchase price and is likely to be higher..... You probably already knew this :-)

Adrian Lammersdorf-Scioll · Answer

Thanks for the responses, all this really helps me a lot.  I have a bit of a lucky situation where I met the owner in the gym that I work at so I think I have some leverage with negotiations.  He needs to sell soon so he can 1031 for a property hes trying to get in DC.  I probably wouldn't be as interested in the loopnet property if I hadn't met him in person before hand.  Either way im not sure how loop net works, do they pay realtor fees or is it a seperate thing?  This property does not come up on the MLS as a for sale.

Justin Moy · Answer

4 or less units should be available on residential sites, so I'd start there. I'd even ask the broker on loopnet to provide sales comps. Of course, take them with a grain of salt and assume those are the BEST comps by leaps and bounds. But you'll know if the broker can't even provide strong comps then there probably aren't many out there.

I've had brokers give me comps from 20 miles away in a major MSA and use that as justification for their pricing, which let me know immediately that they were full of it.

I'd also ask the bank how they will value it, based on income or based on comps. Depending on your experience managing properties I've heard some will use a mixture of both or lean more heavily one way or the other based on who is purchasing it and your past experience running properties.

Alex Ramirez · Answer

You should be able to find comps with your realtor’s license, if not you can use redfin. Just do a search of a mile to 2 mile radius of all the 2-4 Unit properties that have sold. Then compare the condition of the current property to the condition of your comps, whichever comp is the closest to the characteristics of the property you are trying to buy should give you a good ball park estimate of how much this property is worth. Then find the ones that are fully rehabbed and that should give you a ball park of how much per sq/ft your property will be worth after repairing it. Get the total value of the rehab and subtract it from the total value of your property fully rehabbed and that’s your offer right there. Don’t forget to add closing cost, carrying cost and if you desire to make a profit. Good luck!

Adrian Lammersdorf-Scioll · Answer

Appreciate the response, but if this is a listing on loop net how would I do the comps?  It was listed as multi family, I was confused on which it was.  I don't have any experience buying anything over one unit at a time.

How to analyze a multi family deal

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