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Updated over 9 years ago on . Most recent reply

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Ray San Miguel
  • La Mirada, CA
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Apartment complex deal analysis

Ray San Miguel
  • La Mirada, CA
Posted
How do you analyze an apartment complex deal? No property in particular just want to understand how to look at them.

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Greg Scott
  • Rental Property Investor
  • SE Michigan
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Greg Scott
  • Rental Property Investor
  • SE Michigan
Replied

While single family houses are typically valued on comps, apartments are valued on net operating income. Easiest way to think of this is if you pretend and apartment is a business that has nothing to do with real estate. You pay for the profit the business makes. In the case of apartment, NOI is the key profit metric.

In any given location or class of apartments, people will expect to get a certain level of return on their money. In a nicer neighborhood or newer apartment, they might be willing to have a smaller return than an rougher neighborhood or older apartment. This expected return is known as the Capitalization Rate or Cap Rate. Cap Rate = NOI/Acquisition Cost

So if a certain style of property in a specific area are selling for an 8% cap rate, you can calculate what any specific property should cost, based on the specific NOI of that property.

  • Greg Scott
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