How to analyze numbers on an apartment complex?

Question

Does anyone have a simple way they have developed to analyze the numbers on an apartment complex- I.e. how do I know whether a specific offering is a good deal?

Anthony Dooley · Answer

Watch Grant Cardone on youtube. He breaks it down better than anyone else that I have seen. Plus he is more entertaining.

Justin Goodin · Answer

Check out the free underwriting webinar @Charles Seaman does every Saturday 👍

Ken Primrose · Answer

@Ken Primrose

Thanks for all responses so far. I realize I should have given a bit more context. I currently have 20 units (sf, duplex, triplex) and am closing on an 8-plex in a week. I’m currently looking at a 38 unit apt. Complex and I suppose I’m asking what are the distinctions to running numbers on something like a 38 unit v. A triplex (which I’m comfortable with). When I look at the numbers it looks like a great deal to reposition but I’m just trying to see if anyone has some experience as they move to bigger properties with more units and what did they need to account for that wasn’t common knowledge with smaller deals. Hope that makes sense.

Spencer Gray · Answer

@Ken Primrose the quickest, back of the napkin way of analyzing a deal is by using the 50% rule. The 50% rule assumes that there expenses will be ~ 50% of a properties NOI (Net Operating Income).

So let's say the average rent of a 100 unit apartment is $1,000/m.

100 X $1,000 = $100,000 X 12 (months) = $1,200,000 of GPR (gross potential income). Not accounting for vacancy OR other income.

$1,200,000 X .5 = $600,000 of NOI

Now let's say the purchase price is $12,000,000 (NOI at a 5% cap rate) and you will get a 75% LTV loan with a 3% interest rate with at least one year of interest only.

$12,000,000 * .75 = $9,000,000 in loan proceeds X .03 = $270,000 of an interest only payment (NON AMORATIZING)

That will leave net cash flow NOT including capex, RR deposits, AM fees, etc of $330,000.

Let's also assume your required equity = 30% of the purchase price with down-payment, third party reports, lender fees, closing costs, etc. So let's assume 30% of purchase price for equity = $3,600,000

For cash on cash assuming no changes to operations $330,000/$3,600,000 = 9.1% cash on cash

9% is a pretty good cash on cash. Now I would do a more in depth analysis that takes into account actual financials, incorporating your business model, including all line items, etc.

There are many flaws in this method, but it can be better than nothing.

Brandon Vukelich · Answer

Not sure what you mean exactly when you say "simple" way to analyze a deal and "good" is very dependent upon the investor.  I use a "snapshot" spreadsheet from our office to run some basic numbers on small deals and a more advanced spreadsheet (provided by my mentor group) on the bigger or potential syndicated opportunities.  I would say it's a potential good deal if it meets your criteria on ROI, Cash on Cash, CAP, growth, etc. Keep in mind, some "good" deals look good on paper but maybe the area, demographics, local laws, etc make it more of a bad deal in reality.  Best wishes on your investing journey!

Ben Nelson · Answer

I agree with @Brandon Vukelich - you need to define what “good” means first and foremost. And as he mentioned, numbers on paper are not everything…make sure you’re digging into the market itself and making sure the numbers are real and sustainable.

William Costello · Answer

@Ken Primrose studying and analyzing the market itself is super helpful to make sure the numbers you are looking to obtain are realistic. Good luck!

Cody Lewis · Answer

To everyone's point in the thread, it's a balance of both. Analyzing a deal is science and art.

That said, I've yet to find a "simple" way to look at all the information to determine if it's a good deal. You could likely find someone people willing to share some of the tools they use to evaluate deals but the big thing is, where do you feel comfortable with the numbers needing to be for it to be deemed "good".

Mike Dymski · Answer

The biggest difference is that your value of the 38 unit will be based on the NOI that the property generates divided by the market cap rate for that type of property...rather than comparable sales value for 1-4 family properties.  Commercial debt rather than residential.  You may also have expenses for things like landscaping, snow removal, and pest control.  The biggest difference is property management.  There are tons of residential management companies that focus on 1-4 family properties...or commercial management companies that focus on 100+ unit communities.  In many submarkets, there are not 3rd party management companies that have a focus on 10-50 unit communities, and that means that turns could be slow and maintenance could be expensive...need to include that in your underwriting and buy fat deals that can absorb those costs.  Good luck.  With 20 units already, you can easily take down a 38 unit (just need a good management solution).

JT Crownover · Answer

@Mike Dymski @Ken Primrose

Ken, are you asking are you asking for some rules of thumb to do an initial back of the envelope analysis of a multifamily? I’m looking for the same thing. I want to be able to scan through multifamily like I do SFR. Things like the 1% rule, the 2% rule, the 50% rule.  You guys ever apply anything like that to multifamily?

JT

How to analyze numbers on an apartment complex?

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