That Magic Formula
I will tread lightly on this topic as I am aware that some investors buy appreciation, some cap rates, some cash flows. But I have seen threads that ask "How do you calculate........."
Can we start a thread of different formulas and philosophies when analyzing multi unit complexes, say 30, 40, 50 , 100 units and up?
For example :
NOI x 10 = offering price
or
NOI - Debt Service = cash flow / 12 / # of units
If more than $50/unit, buy. If not don't.
Also figure cash flow/year x 25% for taxes.
Just thought it would make an interesting thread to see just how many numbers, formulas, and philosophies different investors use when coming up with an offering price for a big apartment complex.
Thanks,
Larry
Larry,
I'm a nice simple cap rate guy myself. I try to buy existing rented buldings on a 12% cap. (not that I buy many of those).
On development deals I figure the after-development value as a 10% cap on the projected NOI. I try to get in (all development costs) for about 60% of that. Sometimes I'll go to 70%.
Mark
Read this article. May help you out.
http://www.thecreativeinvestor.com/modules.php?name=News&file=article&articleid=467
The generic answer is that 1-4 units are valued based on comps, and 5+ units are valued based on comparable cap rates.
Interesting choice of topic! Cap rates are always being debated, and everyone has their own answer. I was a Commercial Real Estate Analyst at a mortgagebank/REIT, so I always tend to look at cap rates from a lender's perspective. High cap rates might be good for an investor, because it means higher cash flows, but on the flip side, it also means that the potential loan amount you can get will be lower, as the lender's valuation of your property will be lower.
It's not just type of property that decides the cap rate that should be used to value a property, it's also the characteristics. For example, a garden-style apartment complex with great management, steady rental history, in a strong market, could get away with an 8.5% cap rate, where a similar complex in a less desirable market may be valued using 10%. Gas stations, hotels, etc..would probaby be 11% or higher. There are publications avaiable that survey the average rates of return investors expected on different types of properties.
Amyway, multifamily is generally the most stable of the major food groups. Just be wary of properties you find with super high cap rates, because lenders may underwrite the income less than what it is, and the expenses higher. You may not be able to get the financing you want if the lender uses the lower of sales price or appraised value.
Just my two cents! =)
Amy Cheng
Real Estate Investment Analyst & Consultant