Multifamily Myths: 5 Reasons Investors Think Multifamily is Easy to Value


Come on, admit it… you’ve heard it all before. To determine what an apartment complex is worth, all you have to do is divide the Net Operating Income (NOI) by the cap rate. It’s so simple, it can even be done backwards – if you know the property value, all you have to do is multiply the value by the cap rate and you’ll now know what the NOI is. It can also be done sideways – divide the NOI by the value and you’ll get the cap rate. I know what you are thinking: “Hey Brian, this multifamily game is easy, no wonder a guy like you can be successful doing it.”

I’ll stipulate to the notion that the formula is simple, but my objective in this series of articles is to expose myths and either debunk or confirm them. So which is it? Myth or magic?

Now that you know the formula, it’s obviously magic because everyone reading this article can now give me the answer to the missing variable as long as they are given the other two known variables and a calculator. But wait… you guessed it. This is where it gets difficult.

I think that Donald Rumsfeld, the former US Secretary of Defense, said it best. “There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.

Related: Multifamily Myths: 5 Reasons People Think Multifamily Investing Is Easy (& Lucrative!)

Therein lies the trap in placing a value to multifamily properties or any other income-producing real estate. You are buying the income stream, and that income stream has value. But how much value? And how much is the income stream? No, I mean really… how much is the income stream? You may think you know, but you might not know. There unknown unknowns.

Consider these five key takeaways:

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5 Reasons Investors Think Multifamily is Easy to Value

Myth #1: Income is easily quantifiable.

The truth: Income is difficult to quantify.

What are the rents? How much below the quoted rate are they really charging (this is called “loss to lease”)? How much are they losing to physical vacancy now, and how much is expected in the future? If you decide to raise the rents, what will your vacancy rate be? Are there concession losses (ever seen those “first month free” banners)? What about units that aren’t rented because they are given to employees, used as a leasing office or model unit, or as storage? Those are called non-revenue units.

And let’s not forget that tenants have their own problems, and sometimes they skip out and leave you holding the bag for hundreds or even thousands of dollars in unpaid rent (it happens often enough to have its own name — Credit Losses). These are known unknowns. But you have to figure it out, and whatever you do, don’t be wrong. Self defense: estimate conservatively.


Myth #2: Calculating NOI is foolproof.

The Truth: It’s called NET Operating Income, remember?

NOI consists of two components: 1) gross income and 2) expenses. Subtract number two from number one, and you get NOI. But what about number 2? Expenses consist of many individual components, and some of them are easily forgotten. Make a list of expenses that you use consistently on every property that you analyze to make sure that you never forget to include an expense. A consistent approach to underwriting income and expenses will help keep you out of trouble.

Myth #3: To gauge your expenses, simply look at the seller’s.

The Truth: Your expenses will be different than the seller’s.

Whenever someone tells you to just take the seller’s trailing 12 month net income and divide that by the cap rate to get your value, ignore them. When you buy the property, it’s very likely that the tax assessor will re-assess the real estate and the taxes will go up. You have to account for that in your expenses. Next year’s utility bills will likely be higher than last year’s. (Has your rate ever gone down at home? I didn’t think so.)

The seller might be self-managing (which is usually a clear sign of trouble), but you being the professional that you are will hire an experienced management company, and it’ll cost you. Subtract that expense. The seller’s sister might be the on-site manager and work for minimum wage because she couldn’t get a job anywhere else, but you’ll have to pay an experienced manager, and that’ll cost you more. You get the idea; the list goes on and on.

Myth #4: I can determine my ideal cap rate.

The Truth: Cap rate is determined by the market.

OK, you finally got the income figured out. To complete the simple equation that I introduced you to in the intro of this article, you need to divide the income by the cap rate. But what’s the cap rate? If you tell me that you want a 10% cap rate, you’re missing the point. Cap rate isn’t about you. It’s about the market.

Don’t believe me? Wait until you’re a seller… I’ll bet you won’t tell me that you want to sell at a 10% cap rate! The cap rate is what other similar properties are trading for. You need solid comps and opinions from brokers and appraisers in that market who can tell you what they are seeing in the market in terms of cap rate.


More on cap rate.

Because it’s so important, I’ll give it two key takeaways. Cap rate is useful in determining your exit value. Almost every new multifamily investor wants to utilize cap rate to determine their acquisition price. Then they scream that all of the other buyers are crazy, paying too much, and they can’t find a deal. The reason that’s happening to them is professional buyers of multifamily properties use cap rate to underwrite their exit, and use cash-on-cash and IRR to underwrite their acquisition. This is a known known. How do I know? Because I’m one of those professional buyers, and that’s how I do it. By the time you’ve read this entire series of articles, you’ll know why.

Related: New to Multi-Family Valuation? This Awesome Program Can Help!

Yes, I’m still under-promising and over-delivering, so here is takeaway #6.

Bonus Myth #6: There are no other metrics needed.

The truth: There is income from operations, but there is also income from gain on sale.

People tend to focus on cap rate, but cap rate only accounts for the income from operations. Think of cap rate as a two dimensional measurement in a three dimensional world. So how do you value income property properly? Internal Rate of Return (IRR) accounts for cash flow from operations and cash flow from the gain upon sale. It also accounts for the timing and direction of cash flows. Use cap rate to calculate your exit price, and then calculate the cash flow from the gain. Then calculate your cash flow each year and put all of that in a spreadsheet to calculate the IRR. The amount you can pay for the property is the price that gives you your desired IRR.

Remember, cap rate isn’t about you, but IRR is all about you.

Up Next…

Now that there are no known unknowns on the mathematics and supporting theory of calculating the value of an income producing property, it’s time to move on to the next myth: economy of scale. Stay tuned and read all about it next week.

Myth #1 is that multifamily is easy to value. Is it? Or isn’t it?

Let’s discuss in the comments section!

About Author

Brian Burke

Brian Burke has raised tens of millions of dollars from accredited investors and family offices during his 25+ year real estate investing career. His focus is on residential real estate but has also done development, self storage, and commercial deals. Brian has completed more than 500 single family flips and has acquired nearly 1,000 residential rental units comprised of large apartment complexes all the way down to single-family homes.


  1. Jim Biggs

    Brian, we need to have a word with the management here at BP. Why can I follow a forum post (subscribe so to speak) but not a series of blogs like this one. I have been sitting on pins and needles all week hoping I would not forget to check back in. Thanks for this series.

  2. I love this article Brian. I never knew you were big into multifamily. I thought you were into high end flips.

    I especially like your focus on cap rates in this article. There are actually sub markets located within large markets. For example the cap rates for the beach front property in LA is probably a lot lower than the cap rate in South LA.

    • Brian Burke

      Ha! Surprise! I did cut my teeth in RE by renovating and reselling houses and I still do that so I understand why you’d think that.

      You are right about cap rates Anthony. That’s why I say that cap rates are about the market, not about you. Many people misunderstand that. You nailed it though. And just because the cap rate is lower on beach front property doesn’t mean that the one in South LA with the higher cap rate is a better deal.

  3. Roy N.


    I don’t pout nearly as much or loudly as Mr. Leybovich, I’m still 0 for 6 this year in the local market finding CoC and {M}IRR which makes me smile.

    I’m not sure if you telling everyone to sit CAP by the exit and hang with IRR and the cash might not reduce the pool of burned out owners and properties in the coming months 😉

    • Brian Burke

      You’re preaching to the choir on your 0 for 6, Roy. I advocate for doing it right but don’t advocate that doing it right makes it easy. I just closed on 276 units last month. I was presented with hundreds of properties since my last large Multifamily acquisition and I underwrote 160+ of them before finding one that worked. But I just needed one…

    • Brian Burke

      HAHA! Myth #4 had two but the editors didn’t number the second one. “More on Cap Rate” is Myth #5. That’s OK though, because the editors did a great job making this article really look great and I appreciate their hard work. 🙂

    • Brian Burke

      Very true, Ben! You taught me that a monkey can do it and for that I’m eternally grateful. HAHAHAHA!! Yeah, admit it, you set yourself up for that.

      But here’s the deal…anybody can buy an apartment building but only the educated can do it right. I think that is one statement we can both agree upon. Perhaps the only statement…

  4. Hi Brian – first off great article! I’m still very much educating myself on the inner workings of MF investing. For the most part I understood the article except for Myth #5 / 6 regarding IRR’s

    Sorry to ask but could you give a definition as to what “Gain upon Sale” is? And how that is calculated?
    At what % should I conservatively estimate increase in expenses each year to determine cash flow?

    • Brian Burke

      Thanks for the feedback, Alan! Gain Upon Sale can be calculated three different ways depending on whether you are looking to calculate the profit that was made when you sold, the taxable income, or the cash to distribute. Since this discussion was about calculating the IRR, I’ll focus on the cash method. It’s pretty simple.

      You just take your sales price (the one that you forecast using a future market cap rate and the future income in the year of the projected sale), subtract the cost of sale (commissions, closing costs, etc.), subtract the remaining principal balance of your loan at that time, add or subtract prorations for taxes etc, and add cash reserves and utility deposits on-hand and that will give you the cash left over. The cash left over is what you are putting into your spreadsheet for the “gain on sale” when calculating IRR.

      By the way, I think my use of the term “gain on sale” in this context was really an inaccurate description, or perhaps just an oversimplification…a better term would have been “liquidating distribution”. That’s truly what it is. It’s more than just gain.

  5. Geoff Anderman

    Hi Brian-
    Thanks for the informative post. Based on what you wrote, is it safe to assume that you don’t build any cap rate compression/improvement into your exit assumptions when pricing your deals (i.e. exit cap rate = entry cap rate)?

    My prior life was spent in the prior equity world where the equivalent of cap rate is essentially the EBITDA multiple (and EBITDA essentially = NOI) – businesses were valued as a multiple of the EBITDA they generate. We typically would never assume any expansion in the EBITDA multiple from entry to exit when pricing deals – if in the event that actually happened, it would just be icing on the cake. CoC and IRR was just driven by EBITDA growth/improvements and debt paydown during the holding period and we would price to a target CoC/IRR, as you describe.

    • Brian Burke

      Great question, Geoff. Yes, EBITDA is the corporate earnings equivelant of NOI, but cap rate is not the same as the EBITDA multiple. It’s the same idea, but it works in reverse. A higher EBITDA multiple would result in the company’s value to increase, but an increase in cap rate causes the real estate’s value to decline (assuming the same NOI).

      So the formula is EBITDA X multiple = value. And in real estate: NOI / cap rate = value.

      Now that that’s out of the way, I’ll move on to your actual question! In today’s market (and almost every market) I never underwrite cap rate compression. In fact, I underwrite to cap rate expansion. In other words, I assume that the cap rate when I sell will be higher than it is now. If the NOI were to stay the same, this would mean that I’d expect to sell the property for less than I’m buying it for. It doesn’t work out that way, however, because I’m underwriting to a higher NOI upon exit. I get there by improving the property so that I can charge higher rents in the future than the property is charging now, coupled with controlling expenses and achieving some market rent growth. And yes, if cap rate compression were to happen (which I doubt it will) that truly would turn a home run into a grand slam.

      Hope that helps! Sorry for the long-winded answer, I wanted to make sure other readers without a private equity background could understand too. 🙂

      • Geoff Anderman

        Thanks for the detailed response – very interesting. And thanks for pointing out the difference b/w EBITDA multiples and cap rates, as I glossed over that distinction in my original comment (one’s a numerator, one’s a denominator).

        Just like you and NOI, in the PE world we were always underwriting a higher exit EBITDA vs. what we acquired based on revenue growth, margin improvements, etc. but always assumed our exit multiple remained the same as our entry multiple. Of course we never built in compression on the front end, and rarely changed it when calculating current/projected returns during the hold period absent something significant happening in the market or with the company to warrant it.

        How much cap rate expansion do you typically build in and do you always do that as a policy for conservatism’s sake? Or do you adjust that assumption depending on your view of where you think the market relevant to your investment is going over the course of your hold period? I’d be curious how your targeted returns compare to PE’s.

        Thanks again – super helpful info. Really appreciate you engaging on here.

        • Brian Burke

          Agreed–keeping it conservative is the way to go. I typically build in a tenth of a percent per year for cap rate expansion, but I have a very easy mechanism to adjust the growth rate on the fly if the situation warrants it for some reason. I do this because I think that cap rates are actually likely to decompress so it’s part conservative but equal part simply realistic. Many syndicators don’t do this and that’s why they promise these unusually high IRRs that they likely won’t achieve. But that’s another story.

          I also perform a cap rate sensitivity analysis so that I can see how the exit price and investor IRR react to cap rate variation. It’s important to understand that “worst case scenario” so that investors can decide whether the investment is right for them given their objectives and tolerance for risk.

          As to targeted returns, this varies. I target what I think will sell given the profile of the opportunity. I’d target a lower IRR on a stabilized class A deal than I would on a heavy value-add class C.

  6. william strother

    Brian Burke, this is an excellent series but I have a serious question about CAP rates ( shocker). On some appraisals I’m seeing the CAP was determined by assuming the desired rate of return for a lender and the desired rate of return an investor would want on equity (ROE). The appraiser then assumed the likeliest LTV ratios, in this case 65% LTV and took a proportional part of the returns from debt and equity and combined them to make a CAP. Does this make sense?

    So, for example;

    Debt 65% @ 5% = 3.25
    Equity 35% @ 10%=3.5
    = 6.75% CAP rate.

    That was the methodology.

    The whole method is confusing enough, but in this scenario they aren’t even calculating what should correctly be called a CAP%, right? This is really either the Weighted Average Cost of Capital or the Discount rate. They are assuming desired yields, and this is a discount rate. A Cap rate properly understood should simply be a percentage return and not necessarily something referenced out into a broader context.

    What further confounds me about this is how unscientific the Appraisers arrival at these rates was. I wouldn’t actually disagree with the CAP they determined–It’s pricing risk appropriately IMHO, but how did he get these numbers? There were no comps provided.

    • Brian Burke

      Interesting question, William. I think that the way appraisers arrive at a cap rate and the way the market responds to cap rates are different. But I think that the appraiser’s scientific approach might have some merit. When I buy, I underwrite to an IRR (not a cap rate), and that IRR is effected by finance cost, LTV, etc as well as the income and expenses. If LTV’s drop or interest rates rise, I’d have to buy at a higher cap rate to produce the same IRR. What this appraiser is doing is taking the market’s appetite for IRR and reverse-engineering that into a cap rate. Cap rate is not really a rate of return, it’s simply income divided by price and gives a means of comparing various income streams to one another. It would only represent a rate of return if you paid cash for the property and had zero additional costs of acquisition (impossible).

      • william strother


        Thats interesting. I guess what I mean’t by “unscientific”, is that he didn’t demonstrate his arrival at the number. I put a lot of emphasis on figuring what an appraisal will say because I’m buying cash and attempting to refi out my whole principle with SFR’s and duplexes.

        I guess really I wanted to ask two main questions:

        1.) Is this method of arriving at a market CAP something you’ve seen before, or do you mostly just see values arrived at by pulling comps from that same asset class and submarket?

        2.) If it is something you see how is this guy sourcing the numbers? (SIDENOTE: In the appraisal report I’m reading he said that the housing type (lofts) required too subjective of an adjustment for comps to be useful so he went with a completely internal income approach).

        • Brian Burke

          Yes, I’ve seen that before, but not often. Seems most relevant if there are no comps to pull and you still have to arrive at a cap rate. Comps are the best way to determine market cap rates, but in the absence of comps the next best thing is to estimate a trade based on available financing and investor’s appetite for return. Definitely not an exact science, but there’s little alternative. You already know this because you’re asking how he got his numbers…and the answer is he made them up by using educated guesses. I suppose it’s just best to remember that an appraisal is an opinion of value, it’s not THE value. THE value is elusive…

  7. william strother

    Thanks for answering those questions. The only way for a newbie like me to understand the importance of various formulas, how applicable they are etc is to ask.

    Your right about the CAP not being a real rate of return since it’s implicitly hypothetical.

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