Evaluating Multi-Family Deals
What formulas should I use to evaluate multi family / apartment properties? How do I make sure the numbers make sense before investigating a property?
Nick
What formulas should I use to evaluate multi family / apartment properties? How do I make sure the numbers make sense before investigating a property?
Nick
Gross Rent Multiplier = Sales Price/Gross Scheduled Income
The lower the GRM number the better.....
Net Operating Income = Gross Operating Income - Operating Expenses
Cap rate = Operating Income/Sales price
Debt Service Coverage ratio and IRR are others but this is a start......compare to some comps in the area
Start googling and then find a good book....Lots of good info on this board if you have the time to read posts or know how to search
Thanks.
For CAP RATE, the calculations are based on NET Operating Income not Gross. This is income after expenses divided by asking price. The rate 10 or above is good. (This indicates how much you are anticipating a return on your investment.) By the book - The Best Dam Commercial Real Estate Investment Book Ever Written, by Minica Villasenor (very easy reading)
It is NOT correct to assume that the Cap rate is your expected return on investment.
ROI can only be calculated when you take all variables into consideration, such as invested capital or down payment, tax basis, and exit price, among others.
You can buy a property with a cap rate of 50%, but if you sell if for less than what you paid, your return is certainly not going to be 50%.
NOI = Gross income - vacancy - (credit and collection loss) - operating expenses
Cap rate = NOI / Price
Cap rate is simply a ratio of net income to purchase price and is used as a tool to aid you in choosing between comparable investments.
Get this book and read it ALL the way 2x.
Will help you a LOT:
http://www.amazon.com/gp/product/0071422579?ie=UTF8&tag=xanga04e-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=0071422579
[ Edited by Kimtd on Date 08/17/2007 ]
look at how the property can be improved.
Can a cell tower be put in the back
if you paint it will the pay 50/mon more.
Things like that.
DO IT AND ENJOY
So.....after day 1 it is unanimous.................................................................................................................................Go For It!
Any naysayers out there? Speak now.
Like was said before, buy him out and do it yourself. You CAN do it! [ Edited by d_random on Date 08/22/2007 ]
Talk to a tax advisor if you decide to buy him out. It may make sense to let him retain a small piece to keep the property taxes from getting reassessed to FMV. If less then 50% changes hands, you may be able to retain the old assessed value.
seems pretty doable based on the fact you provided.
The big face here is would be the DSCR, which is a ration that tell how cash flow positive you are.
Atleast your not trying for 105% LTV and wondering why banks are turning you down.
Anything above 4untis is treated as commcercial so you are in the 75/25 game. This is where you will probably have the most fun!
I agree that stated maybe the first place to start - Have you thought of going to a particular bank with your current portfolio and refinancing into commercial?
Then you could go to the same bank and ask for terms for the new deal, maybe explain your two-step strategy is part of developing a relationship with same bank?
REMEMBER: The realtionship goes hand in hand with your strategy...
There are lots of different programs available to assist you in obtaining financing.
Is the owner of the apartments will to hold back a second to allow you to obtain the 75-80% mortgage on the property?
I have been looking into some apartment deals, however I am looking for those that have some seller financing options, because I know we will need some cash for maintenance and some improvements along the way.
Good luck.
Hi,
Yes it is possible. I do commercial loans and I also have some buildings for sale. What area are you looking to purchase? Let me know what you want to do.
Lisa537
[ Edited by Lisa537 on Date 08/22/2007 ][ Edited by Lisa537 on Date 08/22/2007 ]
do a google search and use the term "cap rate"
this is what my development financial package looks at:
Performance Measures
Profit on Cost% 37.40%
Profit on GDV% 27.09%
Development Yield 7.11%
IRR % 29.03%
GDV=gross development value. Look at how these number vary.
For me... ROI is strictly CCR
Screw this IRR/time value of money stuff... Call me impatient. I want it now!
why 11months an not12?
Vacancy allowance.
Chris
You can also reset water heater temperatures.
And install water-saver restriction washers on the shower heads.
[addsig]
You may have already thought of this, but if cooling is your biggest expense, I would suggest putting more insulation in the attics. Around here it costs about $0.55 per SF. If you have flat roofs, you could paint them white or metallic to keep the sun from beating down.