Cap Rate on Vacant Multifamily

[La'Terrius Campbell]

How do I figure out a Cap Rate on a vacant multi family considering it doesn’t have any income at that moment, but could rent out 750 a unit and it has 7 units?

[Joshua Michael Hauman]

Hey @La'Terrius Campbell!

You can calculate a pro forma cap rate using:

Projected NOI / Expected sale price
Pro forma cap rates are based on projected future performance which may be subject to a range of risks and uncertainties. Its only one metric and you're backing into it in this case so I wouldn't put that much weight on cap rate in this situation.

When I underwrite deals for Net Lease assets I care about the cap rate. When I do the same for multifamily I care far more about NOI. NOI directly reflects a property's cash flow potential. Cap rate is more of a measure of market sentiment rather than return. My personal suggestion is in line with @John Swann, figure out how much is necessary in repairs and what the income stream of the asset is after taking out all monthly expenses. 

Once you have that sorted figure out how much debt service you're comfortable with. You can calculate this to be an absolute minimum of a 1.25 DSCR.

If you have 7 Units at $750 a door thats top line with no vacancies at $5,250 a month and $63,000 a year. On a 7 unit like this depending on the area an expense ratio of .65 would get you an NOI of $22,050. This means that to reach a DSCR of 1.25 your debt service must be below $17,640/year or $1,470/month.

This is absolute bare minimum for DSCR. Once you have your debt service sorted out you will know about how big the loan size will be. This will better inform you of the price you can pay for the asset itself and how much equity you will have to bring to the table.

Without knowing the details of the property and how much work and effort you're willing to put in this is how I would look at it.