How to Analyze a 5-unit multifamily with no cap rate data

Question

I'm new to multifamily investing (have 5 single family rentals) looking at a 5-unit property. Property is poorly maintained, lacks proper paperwork on expenses, but is in a great neighborhood and presents a great value-add opportunity at the right price. What I'm trying to assess when pricing an offer is, how can I get enough recent commercial rent and sales data to determine a likely cap rate for an eventual refi or sale in underwriting. In residential, comps are available on Redfin or Zillow, but I just don't know how to price this offer appropriately.

Any advice for this newbie?

Casey Christensen · Answer

If you are primarily concerned with the cap rate for the sale or refi then I would recommend finding some brokers in your area and calling them and asking them what cap rates they are seeing for stabilized properties in that sub-market. I would look for Marcus and Millichap, colliers, arcadia, CBRE and then google apartment brokers in your city and give them a call. I would also look call some local banks and credit unions and ask to talk with a commercial lender and ask them what method they use in appraising properties of that size and if they use the income model based on cap rates, what cap rate are they seeing and what range have they seen in cap rates over the last few years. You can also go to loopnet and crexi and search properties in your area and then just call those agents listing the properties to build a relationship with them and ask them what cap rates they assets are trading at in your area.

Greg Scott · Answer

Your question is a bit like the tail wagging the dog.

Cap Rate is a good shortcut for understanding the price of a property relative to its performance and gives you a benchmark for similar properties in the area. I have never tried to use a Cap Rate for gauging how much to pay or the ability to refinance.

For deciding what to pay, I look at both cash on cash returns and equity multiples, balancing to two to see if I can derive an attractive return from the investment.

In terms of refinancing, the lender is going to want to see your NOI performance so they can determine what debt load the property can handle given their DSCR thresholds.

Pratap Koppula · Answer

$1,000 rent per $100K Invetsment is the safe bet, if no numbers are available. To futher drill down on expenses, you can plan and estimate below items.

• > Vacancy loss - based on vacancy and rental demand
• > Repairs and improvements - condition of the proprty
• > Property taxes- location and assessment (market) value
• > Insurance - can request some quotes
• > Maintenance - Can resonably estimate (Owners will be able to answer this easily).
• > Management fees - Can get a quote
• > Utilities - see if its common or tenants pays 
• > General expenses and other professional services ball park 2K to 3K depending on location and entity type etc.

Justin Moy · Answer

Are you planning on self managing? For properties like these with no historicals it's tough without an experienced manager in the area, asset class, and vintage of the property. After talking to a few PMs you'll likely get some good 'rules of thumb' you can use before diving in deeper into properties.

If the property is older it will likely have more maintenance expenses. If the tenant base is class C versus class A you'll likely have higher bad debt write offs or later rent payments coming in. Lots of the little stuff that you may not think of can add to big expenses at the end of the year.

For sales and rental data you can use paid services, CoStar is very expensive but the most in depth one. Crexi has a premium platform that claims to offer that info as well but I don't have experience with it. I think it's $99 a year or month, I don't remember.

For rental data I like to use local comps and shop around like you're a tenant, see what others are offering because that's your competition. I'd also reach out to a few banks on this one, without historical financial data you'll want to know what banks will charge you for the loan.

Tony Guarino · Answer

Raj,

I think there are two ways you can do this. In fact, I would do both and see how you comp each one.

1. Comparable sales approach (Per unit) - it seems like you are familiar with comping duplex's, triplexes, etc. Find a few comparables based on the unit type. For example, if the 5-unit contains 2 bedrooms/1 baths per unit and each one is around 1,000 sqft, look for duplexes which contain the same type of units. If the duplex sold for $200,000 ($100,000/unit) then you would comp the 5-unit at $500,000. 2. Reverse income approach - You can find market rents on zillow, look for comparable apartments, reduce what's on market by $100-250 to come up with a reasonable expectation. This will allow you calculate gross income. I'd say you are probably safe using a 40% expense ratio. So your 'NOI" will be 60% of what your total rental income is. Then you want to see what kind of debt you can secure. For a 5-unit, I would try your local banks commercial lending department. (Make sure to ask for their requirements such as: NW, Liquidity, DSCR, Debt Yield) Lastly, you will want to run an analysis and see where you come in at for cash flow. Assuming you are using a spread sheet, you can calculate what you want to make for ROI and adjust your offer price. Obviously you will need to adjust each method by accounting for defensive and offensive capital improvements, but these are two methods to use. Feel free to DM me and I can assist!

Cheers and good luck!

Frank Greg · Answer

I think some of the responses you got here did address your question. On a multi family most often make the mistake by starting out looking for caps and comp sales when contemplating value. What you should be looking for rather.. is the market rent per unit for the area from which you derive net operating income and everything else. The lender is not necessarily looking at the cap but rather the DSCR which is also what you should be looking at. Is the property generating sufficient cash to sufficiently service the note?

Manuel Angeles · Answer

I am able to pull comps for recent sales of 5-units nationwide with Costar. Their comp reports include average cap rate, $ per unit, $ per sqft, GRM, etc.

Raj S. · Answer

I am not planning to self manage, my area property manager that's doing my SFR has also managed multifamily, and I'll trust his analysis with this. Thank you for this helpful information.

How to Analyze a 5-unit multifamily with no cap rate data

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