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Valuating Multi-Family Properties



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By : Rodney McNabb    99 or more times read
Unfortunately, valuating multi-family properties these days isn't so easy. It's not like there are a lot of comparables out there, since many large properties aren't moving.

Most real estate brokers value multi-family properties by using what is called the 'cap rate'. The cap rate is the annual net operating income (before taxes) divided by the purchase price or present market value. The cap rate shows the net income in proportion to the purchase price. If you bought a building for $400,000 and earned $40,000 in net income, the return on investment would be 10%, and the cap rate would be 10.


How do you determine the cap rate on a multi-family property?

Determine the gross income on an operating statement. If the seller doesn't share the actual numbers with you - you can work around that. Simply divide the gross income by 2. This will give you a rough estimate of the Net Operating Income (NOI). Most of the time, operating expenses for a company are anywhere from 40 to 60 percent of the gross income, so we just choose the median percentage level of 50%.

Divide the NOI by the asking price. This will give you the approximate cap rate.

Once you determine the cap rate, see if it is generally between 8% and 12%. 10% is the usual rule of thumb. If the cap rate is lower than 8%, it is generally not worth it. If higher than 12%, there is probably something high-risk about the property (dangerous area, desperately needing repairs, etc...)


The Classes of Multi-Family Properties

Generally speaking, there are four classes of multi-family properties: (A, B, C or D)

Class A: These properties were typically built within the past 10 years or so; have good quality renters with good jobs; there are very little maintenance and repair issues. The general cap rate will range between 5 and 7%.

Class B: These properties were built within the last 20 years or so; the tenants are a mix of blue and white collar workers and some deferred maintenance / repairs. The general cap rate will range between 7 and 9%.

Class C: These properties were built within the last 30 years or so; tenants are a mix of mainly blue collar workers and subsidized housing and has maintenance and repairs. Tenants may be renters for life. The general cap rate will range between 10 and 12%.

Class D: These properties were built 30 years ago, plus; they are usually found in 'bad' areas, and filled with bad tenants. If "D's" are in a "C" or "B" area, you may reposition to a higher cap rate. The general cap rate range will be 12% or more.

The above-listed classifications are for general rules of thumb only. You may have a 40 year old apartment complex that has been repositioned, or fixed up, and is in Class B condition. However, for valuation purposes, the above information will assist you in proper value determination.

Purchasing a multi-family property can be a profitable venture - as long as you pay attention to the numbers.
Rodney McNabb is a part of a team ofRaleigh Realtors that offer services inRaleigh Property Management and Raleigh Short Sales.

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