Flipper · San Antonio, TX · Member since 2016 · 101 posts · 17 votes
I've been doing single family flips, wholesales and picked up 2 rentals over the last 2 years. After getting a Commercial lead that ended up not working out, but was a toe-in-the-water experience for me, I've started looking at Multifamily, CAP Rates, and the like. I know CAP Rates are only a quick reference, but how do you "quickly" factor in the expenses to rehab a property showing high CAP rates, or do you treat that like you would on SF flips/rentals where you deduct rehab costs from the Purchase Price (which I don't think is how it works)? I appreciate the input.
Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
8y
It doesn't work the same way like SFR. You don't do 70% ARV minus repairs or anything like that. The underwriting is more complicated but not too hard. However, in the end it is a similar concept in that you need to find out what value you can bring to property up to. In SFR that is done just by fixing up the property to match the surrounding comps. In MFH it is done by increasing NOI (part of which is bring your property and rents to match surrounding comps).
I would suggest getting Rod Khleif's free book and reading through it.
Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
8y
I developed a calculator in excel that adds the rehab cost to the purchase price thus adjusting the cap rate, if the rate isn't where you want it to be lower your offer or don't make one.
Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
8y
It doesn't work the same way like SFR. You don't do 70% ARV minus repairs or anything like that. The underwriting is more complicated but not too hard. However, in the end it is a similar concept in that you need to find out what value you can bring to property up to. In SFR that is done just by fixing up the property to match the surrounding comps. In MFH it is done by increasing NOI (part of which is bring your property and rents to match surrounding comps).
I would suggest getting Rod Khleif's free book and reading through it.
Flipper · San Antonio, TX · Member since 2016 · 101 posts · 17 votes
8y
@Aaron K. that is helpful and makes a lot of sense. Certainly can adjust the purchase/offer price, but that gives me a simple, internal comparison to consider.
@Michael Le I'll look into it. Thanks for the recommendation.
@Omar Khan Can you chime in here please? This is right up your alley.
Cap rates do not tell you anything meaningful about a property except the unleveraged returns and risk (lower cap rate = less risk).
It is a widely abused metric (because it is so easy to calculate) that does not convey any meaningful information except to determine the margin of safety i.e. spread between unleveraged returns (cap rate) and interest rate on financing.
On to your question J
There is no one way to “quickly” factor in the rehab costs. The extent of the rehab project is dependent on many factor, including (but not limited to):
Deferred maintenance
Additional rehab costs to capture increase in rents
Target demographics
Neighborhood dynamics (including comps)
How much repairs and maintenance a building will even allow? Some older buildings cannot be extensively repairs. Similarly, newer buildings might only need cosmetic touch ups to bring them up to modern standards.
This isn't single-family residence where you can estimate an ARV (good points by @Michael Le), stick your thumb in the air and estimate.
It is primarily an income play although comps do play a part. No matter how much rehab a property has had nobody will pay Class A rents in a Class C neighborhood.
Plus, the nature and scope of the project could mean anything from light value-add on 20 units to deep value-add on 300+ units. Therefore, going off rules of thumb does not work.
You can use rough estimate per property type per sub-market.
E.g. light value-add Class C multifamily properties, 80+ units, in the Fort Worth sub-market are rehabbing between $5,500 and $6,500.
But even this is a very generalized example. The condition of the property, opinion of the property manager and brokers will be the best way for you to estimate rehab expenses per unit.