Multi Family Cap Rates and Valuation?

Question

Am I doing my math wrong? There is a 14 unit in my town listed for 3.6 million and a 30 unit listed for 4.1 million.

Gross rents on the 14 unit are probably 21000 per month or 252000 annually. If I assume 45% of rents are going to expenses I get an NOI of 113400. At a 7 CAP the valuation should be just under 2 million. Yet it's listed for 3.6???

On the 4.1 million multi family I get 360000 annual gross. 55% NOI would be 198000. At a 7 Cap it's worth 2.8 million. Not 4.1 million.

What am I missing. Is it common to go to brokers with your own analysis and says... look this is what I can pay and it's much less than what you think its worth? Or, can you show me how you valued this property based on income? I haven't even asked for financials because they seem so far away from value. Both listings are being listed directly by the PM company that manage the buildings. Two different PM companies operate the two properties.

Abel Curiel · Answer

Hey Andrew!

Your math seems fine. The seller for the 30-unit is listing at around a 5 cap, do you have any comps that traded at a 7 cap?

I see this regularly where the seller isn't too motivated to sell but instead wants to test the market and see whats out there. Some PM companies/brokers won't show financials until an offer is placed but most will share this information upon request.

I'd also ask how they arrived at their asking price. My guess is cap rates have dropped, their expenses are lower than you anticipated, OR they're not serious about selling and just throwing a high # out there.

All the best!

Abel

Charles Seaman · Answer

@Andrew Gingerich It really varies from market to market, but desirable properties in desirable areas are routinely trading in the 3% and 4% cap rate range at this point. Smaller, less desirable markets command higher cap rates. To get a 7% cap rate at this point, you're often looking in very small or very rough areas (or buying a property that needs some serious work).

Andy Crooks · Answer

@Senate Eskridge I hate the IRR for MFR. It’s a marketing metric seemingly used primarily by syndicators trying to justify a deal to get other people’s money. I haven’t seen a good IRR on a buy and hold asset, it’s always based on an exit, usually 7-10 years in the future assuming consistent appreciation. There are differences of opinion on where the market will be in the next 2-3 years so how can one base a deal on everything going right for the next decade?

Cap rates are fine. COC is king.

Scott S. · Answer

@Andrew Gingerich I noticed that 30 unit for $4.1M a few weeks ago and your math is pretty close.  The gross is just under $300k yr and the NOI is $194k.  The CAP rate = 4.7%... that is pretty much in-line with the Wenatchee Valley market.  Not sure where you are getting the 7 cap valuation but those days are for the most part long gone for multi-family on the West coast.

Brock Mogensen · Answer

7% cap is a realistic number to me but depending on the market, cap rates can be as low as 4%. I suggest spelling out your buy criteria to the broker.  If there is a value add component to the property then maybe a low cap makes sense.  There are good value add deals out there you can buy at a low cap because of the great upside.  Just need to look at lots of deals..

Mike B. · Answer

In my market (Madison), Cap rates are extremely compressed and there's very little spread between the different classes.  For example I looked at 64 unit today in a C area with an advertised Cap rate of 5.1%

Frank Iudica · Answer

@Andrew Gingerich

Everything I have looked at in Austin right now for C class has been at about a 4 cap. It’s nuts.

They show a proforma with a potential 5 cap and up based on what the rents could be. I guess with inflation I am paying a premium to hang on to cash while I wait and see where this goes.

7 cap is definitely tertiary markets these days.

Dhaval Taylor · Answer

@Andrew Gingerich

I’d say everyone here hit the nail on the head. Math is good your cap is off. 7% cap right now? Idk. Obviously depends on many different factors, not sure what market you’re in but here in Grand Rapids MI, cap rates are at 5  mid 4s. You’d be lucky to find any multi fam 5.5 and up.

Todd Olson · Answer

Seems like some sellers are basing their prices on future rents and not current market. Cap rates have come down all over the place due to lower interest rates. Cash is cheap now. I have seen this in a few markets I am exploring for multis of this size.

Russell Brazil · Answer

You are using a lot of assumptions. The rent is "probably" X. "Assuming" the operating expenses are Y.  "Valuation should be" Z based on an assumed cap rate.

NAR Commercial Market report lists multifamily average cap rate for Wenatchee, WA at 5.6% for Q1 2021.

You didn't mention what class of property...but lets assume this average covers a range of 4-6.5%. Lets say your estimate of $21,000 a month rent on the 14 unit is under just by $150 a month, that brings us to $23,100 a month. Lets say they have a 35% expense ratio and it is being valued at a 5% cap rate, which is darn close to the average in the market....that gets it to a $3,603,600 value.

I can easily get to a $5 million valuation on the 30 unit too trying to guess what the rents could be and using cap rates reflective of the market.

The point here is the value is determined by actual rents, actual expenses, and in part by the potential rents and potential expenses....not guesses at what they are.

Multi Family Cap Rates and Valuation?

Most Popular Reply