Evaluating Multi-Family Property Values

4 Replies

Hey BP,

After much fear and hesitation I'm finally taking the big step and purchasing my first investment property! I've decided to go small multi-family (2 to 4 unit) and I've began looking at properties in Nashville, TN and surrounding areas in both Rutherford and Davidson County. While utilizing sites like Trulia and Zillow, I haven't stumbled across many properties worth getting too excited about but I did happen to find one that I liked. After doing some research in my local tax assessor's records, I was surprised to see you can access a great deal of information from their database. A couple of those bits were the city's appraisal and assessed values which leads me to my first question. How thorough and therefore accurate are the appraisal values conducted by the city? Secondly, understanding that cash flow typically plays a significant role in multi-family and commercial property, how does one go about determining if a property's asking price is fair/reasonable? Thanks in advance for any members who take the time to read and shed some insight!

Congrats on your decision. Part of starting out is simply making a decision and choosing a path.

Assessed values are usually low, at least in my area. But every municipality can be different. Sometimes they may have higher assessments but only tax you on 80% of it. In my area they tax me on 100% but the assessments are lower than the actual value of the house. Part of the reason the assessments are low are because my area has appreciated in value so much and so quick. My point is that you need to ask some other local investors and get more info about your area.

Have you heard of Cap Rate? If so do you know what the cap rate is in your area? Simplified a cap rate is how much return you expect from your investment. Every area is different. In my area properties are expensive but rents are high. Cap rates of 10-15% were normal but they have dropped to around 8% now because so many investors have come to town. Find out the cap rate for your area and that will help you analyze a property.

Hey @JamesKlafehn,

I've just recently started hearing about Cap rate but I wasn't aware of its significance to analyzing potential investments. I will dig around the site and brush up on my knowledge.Thanks for taking the time to share your thoughts!

I think I can help you with two major points. The way I recommend clients to look at cash-flow property is discovering two numbers. 

Calculate your Deal

The first calculation is the profit and loss for the property without finance payments. This will include everything from vacancy rate (25% is lender standard), maintenance, home warranty, insurance, marketing and taxes.

This will give you the actual cash-flow of that property. For example (quick and dirty example), you acquire a three unit property, each with rents of $1,000 a month. That would give you a monthly revenue of $3,000 per month or $36,000 per year.

Subtract expenses, for an example $500 per month. That means $2,500 in cash is produced each month. 

Find your Break-Even point

Now you know that this particular three bedroom property. Let's say the value of the property is $500k. If you're a fellow BPer you probably already knew how to get to this point, then you go over to a mortgage calculator and see how much the monthly payment will be. This is fine, for a quick estimate but your next step should be calling a great mortgage broker. Let him know the numbers and tell you some financing options that will leave you cash-flow positive. 

He may say it's not possible on some deals, others you might put have to use more cash, but more times than not they will be able to put you in a good position for positive cash-flow each month. That's the main goal, a check in your hand month after month.

hi @ Chris Jordan

I read on the BP site so where that you can ask the seller for schedule E of his or her tax return. This section should list rental income and expenses related to the property. 

Anne

Anne Wallace