I'm starting the analysis of a multifamily in Houston that is being offered to me. I'm meeting the owner tomorrow to tour the property, get the story behind it and ask her for the proper information to help me calculate the NOI and eventually the cap rate for this property. They've been running this as a family business and very casually, I don't expect for her to have all the answers to my requests for information.
Property was built in 1999, however it is clear that needs repairs and tenants in this area are blue collar. I'm hoping to learn more after my visit, I'll keep you updated in an effort to make this analysis an educational tool for you BP'ers.
I'm familiar with the area from a single family point of view, got rentals and flips done, however this is my first analysis of a multifamily and I plan to go by the book as much as I can.
My question is, what do I compare the cap rate to? What is the typical cap rate for a class C property in zip code 77022?
Any insight would be greatly appreciated.
Have a great day!
Cap rate only makes sense to price your exit. It almost does not matter when you buy. Why? Because you need to underwrite your property for the future price (and cap rate) and then subtract your expected profit, rehab costs and then arrive to your maximum offer price. E.g. if your future NOI is $100K and future cap rate is 8%, your future value is $1.25MM. Of that $250K is your expected profit. This leaves you with $1MM value from which you need to subtract rehab costs. Say, it is $200K. Then your max offer is $800K.
Don't forget cash flow! Even if you buy at $800K, the property's first year NOI should at least be be 1.4 times higher than mortgage payments. That wI'll keep the lender happy and still leave some profits for you.