How to do comps for Dallas Multifamily

Question

Hi we are a new group of investors trying to purchase multifamily properties in Dallas, near zip code 75214.

I am looking for deals in the area and I have some questions.

1. How to find comps for sold properties near by

2. Do multifamily purchase price based on how many bedrooms, or how many units, or something else

For example, if I see a 9 units, 11bd/9ba properties, class C, built in 1960, newly renovated, in zip code 75214,

What is the ballpark price for this property?

Sorry again, I am really new investor and I don't really have a broker to ask the information. Thank you for your time.

Carl Millsap · Answer

@Danielle Huang when it comes to multifamily properties like the one you're looking at comps aren't a comparison like single family / duplex units /small multifamily ie. 4plex. The purchase price of that multifamily should be based on the net operating income that the property produces.

Take the Gross Annual income minus vacancy rate to get net annual income. Then subtract all the expenses from the net annual income to determine the net operating income(NOI). Finally multiply the capitalization (cap) rate that you want to determine the price.

Example: A property that has a Gross potential annual income of $288,000 but has a 10% vacancy rate generates $259,200 in net annual income. Let's say the total annual expenses are 50% ($129,600) of the net annual income that leaves a $129,600 net operating income.

If we take the net operating income of $129,600 x a 9% cap rate the purchase (offer) price would be $1,440,000.

If the cap rate is 8% x $129,600 the price would be $1,620,000.

If the cap rate is 10% x $129,600 the price would be $1,296.000.

The lower the cap rate the lower your risk, which increases the price. A higher cap rate means higher risks.

Two identical multifamily buildings like the one you're looking at can generate different net operating incomes.

Ask the owner or selling broker for the trailing 12 (T-12) which is essentially the total revenue w/ all expenses for the past year. That will give you an ideal of what type of net operating income it generates. Don't take that T-12 as gospel, you will have to research that information and come to your own conclusion.

Carl Millsap · Answer

@Danielle Huang I don't know what the CAP rate is in DFW but I recommend you call a few commercial brokers in the area. Also check: apartmentpropertyvaluation.com

As for expense totals if the roof and HVACs are new then your expense totals might be in that range but things to consider:

1. How much are you setting aside for maintenance reserves per door per month? i.e. $250 per door etc.

2. Did you factor in management expense?

3. Did you verify what taxes will be based on purchase price? When will tax assessment / new rate kick in?

4. Are you paying for any of the utilities? Can you bill utility expense back to the tenants (RUBS)?

Rule of thumb use 50% of net annual income for your expenses to see if your numbers work. If you come in below this then you know you're good. Also in this current environment are you factoring for economic vacancy?

Is the DSCR 1.3 or higher? What is your Cash on cash return? What is your criteria?

Just some things to consider. Good luck.

Bruce Lynn · Answer

@Danielle Huang @Carl Millsap is correct.   In most areas there are probably not enough properties to really compare.  Even where there are other sold properties to do comps, like there would be in single family.  Especially if you are looking at places like 9 units.  Also there are big differences often in age and condition.  Completely rehabbed property should sell differently than one that has 20 years of deferred maintenance that has all new tenants at market rates.

Most investors look at a combination of the NOI/Cap Rate/CoC or other financial factors....although those are not the only things to consider and have shortfalls too.   Too many investors are just looking at cap rate for example and that doesn't take ever factor into account.

I think the other trick in DFW area is it is very hard to get good financials on many multifarities for some reason.  Maybe because they were poor investors or poor record keepers.  So many have a hard time even providing current rents it seems.  The exception seems to be if there is good property management in place, then P&Ls and rent rolls and more financials can be available.

Danielle Huang · Answer

@Carl Millsap Thank you for replying me. The points are really helpful to remember, especially you mentioned about 50% of net annual income for the expenses to be conservative. I agree with it.

Danielle Huang · Answer

@carl

@Carl Millsap@Bruce Lynn

Thank you for replying my message and explaining the relationship between NOI, CAP and Sale price. I heard the cap rate in Dallas is around 5.25 to 5.5 for multifamily. Is it correct?  Also, since I will be out of state owner, is it reasonable to estimate around 37%-38% of operating expenses (excluding Interest expenses, considering the exterior and interior are newly upgrated, new roof, new HVAC...) of total rental income. I am tying to underwrite it and make my offer. Thank you for all of your time.

How to do comps for Dallas Multifamily

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