Property valuation can be tricky, even for experienced investors. But there are key elements you’ll want to consider when it comes to deciding what property is right for your investment. Knowing what those elements are and how they’ll affect your property are vital to making a well-informed offer.
There are so many factors to consider when you are valuing a prospective multifamily acquisition. They will all inform your final offer price, and this is something you’ll want to get right. Offering too much could reduce your profitability. Offering too little could cost you the opportunity of ownership.
1. Verify financial performance
For most investors, this is the first thing they’ll look at when considering a property. How much money is coming in every month? And how much is going back out?
You’ll want to look at the building’s expenses and income closely. Additionally, take time to create a deal analysis spreadsheet. These can take a lot of the guesswork out of a real estate deal and help you feel confident about your property valuation and offer price. Finally, make sure you create a property operating budget. That can give you a realistic budgeting expectation for the first few years of operation.
2. Check physical condition
The physical condition of the building will inform you about what kind of expenses your building will likely incur in the coming years. Get a closer look at the condition of the building through a professional inspection process. Inspections should encompass both the interior and exterior of the building. They should look at all the building’s systems (plumbing, heating, electrical, and sewer) as well as general appearance.
Inspections should be thorough to give you the most complete picture possible. Make sure that any inspectors or contractors that you use are multifamily experts. Your inspection needs will be very different from those of a single-family property.
3. Look for necessary improvements
Almost any property you invest in will have some necessary improvements. That could be anything from small deferred maintenance projects to large capital expenditures. But knowing what those improvements are ahead of time will help inform your property valuation.
Build in a budget for improvements by getting estimates from trusted multifamily contractors. Think about improvements you’ll make in the next three to five years, as well. Taking these costs into consideration will help you build them into your operating budget. That helps you avoid a cash-flow emergency later on.
4. Identify value-add opportunities
Buying a property that needs a little work can be a very smart investment. Properties ripe with value-add opportunities can quickly increase in value with small investments of capital.
Look for cosmetic building renovations first. This might be modernizing community spaces, giving rooms a fresh coat of paint, or updating building signage. These are all relatively small projects that can provide big results. Raise the properties income while you lower your expenses and you’ll increase the property’s value in your investment portfolio.
5. Research submarket and neighborhood
Research the rental market. It’s important to get detailed here. Not only should you have knowledge about the wider rental market in your area, but you should know the submarkets as well. Get down to the neighborhood level. Understand the current supply and demand of the market.
What are the market rents? What amenities are renters asking for? And what apartment trends are on the horizon? When you know your market, you’ll know what the property does and doesn’t offer that will make it attractive to prospective tenants (and to you as an investor!).
6. Examine documentation
You’ll need to read the fine print. All of it. Documentation is where you’ll learn the finer details of the property as well as find any warning signs. Read and review the full seller disclosure(s) and documents. Make sure you review the current leases, too. This will tell you more about your current residents and whether they will meet your goals for the property.
You can get a free due diligence checklist here to help ensure you have all the right paperwork to review. If you aren’t sure about something you read, make sure you review it with your real estate lawyer and mentor.
7. Involve management team(s)
The property may be managed by the current owner or run by a professional property management company. Find out how the property has been managed in the past and whether their current operation strategies are working. Remember, you may be an investor, but it’s also your job to lead the management team .
It’s a good idea to engage your own manager during the acquisition stage. They may be able to see issues or opportunities that you don’t. Their insight can be hugely beneficial when it comes to property valuation.
Struggling with property valuation on potential multifamily investments?
Valuation is one of the first steps you’ll take when looking to expand (or start) your investment portfolio. It’s a skill that takes time to perfect, and some investors struggle with it for years. If you want to build your valuation skills, get in touch with us. We can help coach you on your valuation skills and assist in finding the right properties for your portfolio.
Latest posts by Theresa Bradley-Banta (see all)
- Build a Multifamily Portfolio: 7 Key Metrics for Success - September 3, 2019
- The Complete Fall Maintenance Checklist for Multifamily Property Managers & Owners - August 19, 2019
- Smart Tech for Multifamily Properties: The Pros and Cons - August 5, 2019