Determining value for multifamily properties
When you buy a single family home there is a listing price available to you as a baseline reference. With the help of your realtor you look at comparable sales, current listing prices, market dynamics etc. to determine how much you want to offer.
For multi family properties you rarely see a listing price. Instead the seller calls for best offer. So, how do we determine the value of a multifamily property and how much do we offer to the seller?
We use the following approaches:
Rough Estimation Methods
Value = Net Operating Income (available from Seller T-12) / Cap Rate.
The T-12 is the last 12 months of actual operations (income and expenses)
We look at the going cap rates in the market from previous sales and based on our knowledge of local markets to arrive at a rough value for the property.
$ per Door
Value = $ per Door * # of Units in the property.
We look at the $ per Door from previous sales and based on our knowledge of local markets to arrive at a rough value for the property.
Precise Estimation Method
Multifamily properties are similar to businesses and generate income. We can use a Discounted Cash Flow (DCF) method similar to how stocks are priced to derive the value of the property.
It starts with first looking at the net operating income (NOI). NOI helps assess the initial value of the property and it's ability to generate income by looking at it's current cash flow. This measure is considered more reliable because you can see historical records and tax returns to confirm the numbers. NOI is obtained by subtracting property expenses from the total revenue the property generates in one year. Total revenue includes everything from rent to money generated from laundry machines, parking fees, vending machines, pet washes, event space rental and other services. Costs of running and maintaining the property and its grounds, such as property and asset management fees, utilities, insurance and property taxes as well as repairs fall into the operating expenses category.
We then forecast how much we can grow the NOI, i.e how much potential is there to raise rents or collect other fees like reserved parking spots etc. , or how much can we decrease operating expenses by bidding out new contracts for services.
In summary, we use all three of these methods to arrive at a value for the property that we present in our offer to the seller.