An accurate multifamily property evaluation is essential for the profitability and long-term success of your real estate investing business. Beginners should absolutely seek some guidance and input from a trusted advisor. Whether you are planning to purchase an apartment or a duplex, cash flow is crucial. Here are seven steps to simple, quick multifamily property valuation.
Know the market
To help you stay current on trends and determine value for multifamily properties in some major metropolitan areas, Freddie Mac provides the Apartment Investment Market Index. This free online tool is updated quarterly and gives you a better understanding of current conditions and where your local market may be heading.
Evaluate the local area
It is especially important for new investors to stay close to home with investments. You should know the location fairly well and have a good idea of what rents are being charged and if any new apartment complexes are in the works. You need to have a good idea of what locals can afford and what your competitors are offering.
Do some simple math
You should take the total rent a property is bringing in and divide it by the number of units. You have to consider what you can reasonably expect to get after you take ownership. For a quick evaluation, plan on expenses being 30 to 50 percent of your total income. It is better to be overly conservative with your estimate than too optimistic.
Estimate needed repairs
If the current owners have been neglecting basic maintenance and ignoring needed repairs, you must subtract the cost of bringing the property up to rentable condition from the value. Just like estimating expenses, you also want to estimate repair costs on the high side rather than the low end.
Know your cap rate
The cap rate is simply the percentage return you get on your investment if you paid cash for the purchase. Take your net operating income (NOI), which is revenue minus expenses, and divide it by the purchase price for your cap rate.
The unit mix
Unit mix is the percentage of units that are one-bedroom, two-bedroom, and three-bedroom. One-bedroom units are great for single people just getting started. Three bedrooms appeal to families. You must know what is in demand for your market.
Consider why the property is for sale
Regardless of how good something may look on paper, landlording takes place in the real world. You want a motivated seller, but you do not want to buy a headache from someone else.
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