How to Value a Multifamily Property

Multifamily property investing is attracting ever more interest, leading to increased demand. However, many investors are unsure how to value multifamily property. How do you quickly assess deals to see if they’re worth making an offer on, and how much should you bid?

Knowing how to value a multifamily property and keenly assessing the deal for cash flow and value-add opportunities can help you find deals that benefit you and other investors who may not have the time or interest to value the property themselves. In this document, we explore what multifamily properties are and how to value them so you can level up your investing strategy.

What Are Multifamily Properties? Multifamily properties include apartment buildings, duplexes, townhouses, and condo buildings. They are any properties in a neighborhood with more than one housing unit. When deciding which property to invest in, you can use the following steps to learn how to value a multifamily property and understand whether you’re getting a good deal:

Determine net operating income (NOI). The net operating income levels the playing field for all comers, telling you how much income you can expect after you’ve handled the day-to-day financial demands of the property. You can use the numbers provided by the broker for preliminary screening, but you should ask for and research the numbers yourself. You can then do your own calculations by using this formula: NOI = total income – total operating expenses. The total income includes: Total rent. Total fees, which include pet fees, late fees, and coin-op laundry. The total operating expenses will include: Vacancy: 5%-10% of the rent. Taxes: city and county. Insurance: from an insurance broker.
Maintenance: 3%-5% for snow removal, lawn mowing, and common areas.
Management: ask local property managers for rates. Utilities: call the utility companies for rates. Repairs: 3%-5%. Professional fees: for services from lawyers, electricians, or advertising agencies. When you subtract these amounts, you’ll have your NOI.

Calculate capitalization rates (cap rates). Capitalization rates, or cap rates, are the expected rate of return based on the income in real estate. Knowing the cap rate when deciding which property to invest in can be helpful. The formula for calculating cap rates is: NOI / value = cap rate. For example, if the property has an NOI of $50,000 and is listed for $500,000, then the cap rate would be: $50,000 / $500,000 = 10. It’s a simple equation that can tell you a lot about the multifamily property you’re interested in.

Do due diligence. When you’re looking at hundreds of deals, quick analyses can save you a tremendous amount of time. Do your due diligence for each multifamily property that you’re serious about investing in. This includes obtaining bank statements, rent rolls, unit inspections, and so on. All the documentation and hard facts will either confirm your assumptions and verify the numbers, or they won’t..

Go see the property. The last thing you can do is go see the property for yourself. You’ll be able to drive through the neighborhood and see how it is with your own eyes. Walk through the grounds of the building, look at maintenance areas, explore common spaces, and, if you can, go into the units themselves. As you walk around, you need to ask yourself what makes the property unique and what you will need to do to improve it. If the property looks good and you think it’s a deal you want to make, you can move forward with it. On the other hand, if you don’t like it or something doesn’t work out on paper, don’t be afraid to leave the deal. Either way, you’ll know how to value multifamily property the right way.

If you are in need of an experienced commercial real estate broker I can be reached at 281-222-0433, or you can visit here to schedule a consultation: https://calendly.com/vikingenterprise

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