Multifamily Property Valuation Calculation

12 Replies

Hi can someone help me with valuing a property. I use actual income. Would you use actual vacancy as well? The deals I am looking at have low vacancy. If I buy the property and increase the rents the vacancy would go up.

My confusion is,

1. Would I calculate based on actual current income and vacancy?

2. Actual potential income and my projected vacancy?

3. There is even a school of thought to use market rents then deduct 10% vacancy, then 50% expenses and that should give you NOI (rule of thumb).

I search over and over on internet and in books, but there is no definite answer.

Any clarifications are appreciated.

Hi, you need to calculate based on actual income and vacancy. Any future predictions are pro-forma and don't reflect the current state and performance of the property, therefore can't factor in the purchase price.

I'm assuming you a buying with anticipation of value-add, and that is what you do with the property after you buy it.  

@Davit Gharibyan  you should underwrite the deal based on actual income and expenses as is so the vacancy is factored in. That shows you how the property performs as is. 

Next step is to proforma your assumptions. I would not use rules of thumb for detailed analysis. Use actual information and area averages for rents and vacancy. Do not assume you will outperform the averages in the market.

You also need to run some scenario analysis to make sure you can weather a downturn or economic event.

Once you do these calculations you can formulate your offer based on your return requirements. 

Great points Greg! Can you elaborate on the offer. If I run on current data, I come up with one offer, and different scenarios yield different offers. I know there is no right or wrong, what matters is if I make money.

One guy says offer based on actuals, the other is run worst case scenarios... I do them all. This is where the confusion happens. it's analysis paralysis.

Originally posted by @Davit Gharibyan :

@Greg Dickerson You nailed it in one reply. Everyone covers the points but not so clear. They say do this, do that, but they didn't elaborate clearly.

Thank you for your kind words 

Originally posted by @Davit Gharibyan :

Great points Greg! Can you elaborate on the offer. If I run on current data, I come up with one offer, and different scenarios yield different offers. I know there is no right or wrong, what matters is if I make money.

One guy says offer based on actuals, the other is run worst case scenarios... I do them all. This is where the confusion happens. it's analysis paralysis.

It really is up to you and your confidence in your business plan as well as the property itself.  If it’s in a great location sometimes it makes sense to be a little aggressive. 

That being said I always buy on actual never based on proforma 

I determine the NOI after stabilization, calculate the value based on market CAP rates and work backwards to determine what I can pay as is based on my return requirements which for me is a minimum of 30% so to keep it simple for example purposes if the NOI is $100k after stabilization and CAP rates are 7 the property is worth roughly $1.28 million so I need to be able to buy the property for around $1 million minus the repair cost to make 30%. This is the value add method in reverse.

Typical value add method would be to take asking price plus the repair cost to get total cost of asset. You then determine new NOI after stabilization divide by the CAP rate to get your sale price or refi value. Subtract your basis or total cost of the asset and you have your profit or equity that has been created.

Very similar to flipping a house just bigger numbers.

Hi Davit:

In doing your due diligence, you should look at all approaches. 

For example, it's best to start with historical figures to determine how successfully the property has been operating. You can calculate the actual vacancy rate the current owner is experiencing and compare it to the rest of the market. If the owner is running at 99% occupancy and the rest of the market is at 90%, then maybe his rents are below-market or he's in a superior location, etc... 

Once you're more comfortable in your underwriting, you can then project income and expenses based on your knowledge of the market. Real estate value is ultimately determined based on the value of future cash flows, because that is what you're buying.

Point #3 in your OP is a conservative approach and won't work in all markets, but is useful for smaller suburban multifamily assets (say, under 10 units). It's best to underwrite as many deals as possible in your desired markets to get a feel for how properties are operating. To start, however, I think it's best make your offers based on trailing-12 numbers until you're very comfortable with the market.

Happy to discuss further!

Generally, multifamily is valued based on the ratio of net operating income to market cap rate. Net operating income is income minus expenses, excluding debt service. Net operating income includes all revenue losses like vacancy, bad debt, loss to lease, etc. 

If you want to calculate the as-is value, you use the current net operating income. If you want to estimate the value at a latter date, like after you've acquired, renovated, and raise rents, you will need to use your own income and expense projections. 

@Davit Gharibyan

Simple, value is based on actuals, not projections.

However, it is a sellers market and will be for awhile. You’ll end up paying a premium despite the actuals.

Start with the end goal in mind- what are you investment criteria and projected returns?

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