High market and Multi-family

5 Replies

Hi all, 

I have a question regarding value of Multifamily. 

As I understand one use cap-rate to value a multifamily property and not comps. So, I wonder how does an up market, impact multifamily values. 

Is it just high rents resulting in higher NOI so resultant valuation is higher or there are other factors at play?


Income growth is a major factor for growth in property value. 

Another factor in valuation is desirability.  Cap rates compress when there are lots of buyers.

Interest rates will have an affect as well. 

You would benefit by looking at what the factors are that drive the rent growth.  Lack of availability is the main reason and there are a number of reasons for that.

 - New product supply

 - population growth

 - job growth

 - cost of construction

 - cost of land

Basically job/population growth coupled with barriers to entry will help drive rents.  I like to buy when the projection are strong from my data but the rental market is soft due to some factor (oversupply of available units).  Then sell when the market is strong.

Define "multi-family"?? At or above 5 units, you are into commercial lending and CAP rate will be used for valuation.

4 units and below are still residential. Investors will look at things sometimes from a CAP rate to understand if the rental income warrants the price... but appraisals are based on comparable sales and will affect how much you can borrow against a property. Some appraisers will take into account income for their numbers, but many times it's comparable sales in the area.

@Steve Olafson So I guess if you feel you can improve income from property; it is worthy of consideration even in a strong market? 

@Nathan Emmert   Thanks for clarifying the difference; I wasn't aware that <5 units is treated as residential. So, for a >5 units property; I guess income is bigger factor. 

The key thing going on in my mind; I feel like I have missed boat on timing the market; the bottom is behind me by multiple years; but if I can find properties where I can increase income and add value by doing so; may be I should focus on buying those properties and still get in the game; what do you guys think of this strategy? 

That's called being an investor.

There are two types in real estate.  You have people who use real estate as an investment tool like the stock market (investors in real estate).  They are seeking passive, risk adjusted returns on their money.  A lot of them move into asset protection (safer investments that still provide a solid return).

The other type are real estate investors.  These are people who work within the real estate realm to get better returns.  It ranges everywhere from wholesalers, to fix and flippers, to buy and hold investors. 

You're focused on the buy and hold with a desire to buy distressed properties so that you can add value.  Distressed can take on a lot of forms (stressed out owners, unwanted inheritance, damage, mismanagement, rents under market values, etc) but it's a word we use to describe access to properties for less than fair market value.  The value you add can vary.  Maybe you think you're better at managing properties... maybe you think a few enhancemences will significantly increase the rent/resale value... maybe it's unlivable and you can do a whole rehab... or maybe someone just doesn't want the property and you can get a great deal on it (you have cash and want property, they have property and want cash, deal!!).

What separates someone who invests in real estate from a real estate investor is the work they do to beat average returns.  Real estate investors essentially accept a second job (or quit their first job and do real estate full time) to pursue their investments and returns in real estate.

Originally posted by @Tejas Kotecha :

@Steve Olafson So I guess if you feel you can improve income from property; it is worthy of consideration even in a strong market? 

 Depends on where we are in the cycle.  I am not buying in my city right now.  Too much demand.  Buyers are overpaying for even the distressed properties.

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