Multi family cost per unit or per bedroom...?

Question

I am analyzing a potential multifamily property that has a mix of dissimilar unit types (a combination of 1 and 2 bedrooms). It's easy to compare the per unit price of two properties that all have the same unit type (all 1 bedrooms or studios etc), but how do you make the analysis when two properties don't share all the same unit types? Comparing a 2 bedroom "unit" to a 1 bedroom "unit" seems like an apples to oranges comparison. Is it practical to compare cost per "bedroom", or is that not a common metric?

Joel Owens · Answer

Hi Ryan,

Location heavily plays a factor with rents. If you are closer to your job,amenities,nicer areas then people are willing to pay more.

You need to be careful and ask WHY rents are higher?? Do the units have in suite laundry,off street parking,dedicated parking space for each tenant,separate storage units,lake or skyline views,clubhouse,pool,workout room,concierge service,utilities included etc.

You have to make sure the landlord is not giving rent credits for first month or waiving security deposits which will lower your actually monthly rent numbers.Rents could be fixing to drop for the area and the tenants lease terms are fixing to end.Then after you buy they come to you wanting lower rent or they leave.

When foreclosures or short sales happen around the area the new owners that buy for cash or a loan loan amount after down payment can achieve the same or better cash flow with the lower basis.This results in them leasing for below market to retain tenants or fill up fast and puts downward pressure on average rents for the area.

Ryan Swan · Answer

Thanks, Jon. The CAP (calculated by me) is solid at around 9.3% with very low vacancy due to proximity to a university. The per unit price concerned me because it's about 10-15k higher than other complexes nearby. However, this property is on a highly desirable historic street that is closer to the university, with naturally higher prices for all property types. I was trying to better understand how per unit price is calculated to see if it is justified in this case.

Jon Holdman · Answer

No, bedroom is not a common metric.  A two bed unit doesn't rent for double a one bed unit.  Nor does a studio rent for free.

At the simplest, you figure out the average rent for different units types, multiple by the number of units, and add that up for the different types.  Its not just bedrooms that matter.  2/2's would typically rent for more than 2/1.  Nice big one bed units would rent for more than cramped, crummy one bed units.

Price per unit and average rent, averaged across all units, is a pretty common metric.   That reflects that as far as the work needed, a unit is a unit.  Its a lease, its a set of showings, its a rent payment to collect.  A two bed unit that rents for $700 isn't that much different than a one bed unit that rents for the same $700.

NOI and cap rate are common metrics, too.  Don't believe the seller's numbers on either of these.  The only thing you can assume is they won't be any better than what the seller claims.