Evaluating Multifamily Properties
I recently had the opportunity to evaluate several MF properties in the DFW area. They ranged in size from 4 units to 38 units. In each case, the evaluation led to a valuation that I used to either make and offer on the property or to rule out the property as an acquisition possibility.
It is fairly common for MF property listings to contain fairly generic income and expense data. Quite often, the listing broker's evaluation is based on Pro Forma data that projects "market rents" rather than the actual rent roll. Thus, it is important to have basic values that you can use for common MF metrics in order to level set your assessment from property to property.
At a minimum, I use the data provided to determine Effective Gross Income, Operating Expenses, Net Operating Income, Potential Debt Service and Net Cash Flow. Once these numbers are calculated, I can determine an estimated current CAP Rate and, therefore, a reasonable valuation for the property. I can also project future cash-on-cash return based on various purchase prices, financing terms, capital expenses, etc.
The end result is a price that I feel comfortable offering for the property. In some cases, the discrepancy between the list price and any offer price that makes my numbers look "good" is so great that it isn't worth the effort to generate a letter of intent. In other cases, my analysis will yield an offer price that the seller may be willing to consider.
Even though much of this analysis is based on assumptions, it still takes several hours for each property and requires meticulous attention to detail to ensure that all factors are being correctly considered. On the other hand, it is very rewarding when the numbers work out and an LOI can go out the door!