How To Examine Investing In Multi Family - Part # 2

How to Examine Investing in Multi Family

How To Examine Investing In Multi Family - Part # 2

 

How to Examine a Multifamily Investment - Chapter 2 - How to Evaluate the Value of a Multifamily Property

One of the mistakes of investors who are interested in investing in homes for rent
Is that they are looking at how much net rent they will pocket
And they figure out what return they make on the money and are excited that in the land of yield they are next to nothing

They miss the principle number 1 in buying real estate and it always buy below market price
So when looking at the value of a home in the US or in the world at large
Examine how many renovated properties are sold in the area or English
ARV = After Repair Value
Then we subtract the cost of renovation in the specific house we are looking at to reach the same level of renovation
Of the same houses (with the same properties as Garz, Basement and the like) sold renovated in the area
And the number they get is the maximum price paid for not buying it above market price.
For the sake of the demo
If homes with the same properties were sold for $ 1,000
And renovating 30 will go a dollar
(To bring the specific house we are exploring in the area to the same level of renovation and finishing (or added or equal features))
So we want to purchase the house at maximum 70K.
Of course we already want to make a profit in Kenya so we want to buy less
(For simplicity, I did not take into account additional purchase costs)

But wait!
The post at all on how to evaluate the value of a multifamily in the US?

So the reason I showed the common mistake in valuing home buying
Because investors make the same mistake when valuing the investment in Multifamily

(Hope you already realized that this is not going to be a short post )

Investors first look at how much return they make on their money.
So it's true that it's very important for investors how much we make a return on capital
But it is after making sure the investment is in an area that is in demand for rent by paying renters and no less important that the property bought below its value that the profit is made in Kenya.

So how do you calculate the value of a multifamily asset?

If the asset is over 90% Occupancy Percentage (then we'll see what happens if the occupancy is lower or not at all)
Take the net income (before expenses) received in the last year
Reduce spending that year
And this is the net annual operating income in English
WHO WE ARE
Every area even at the neighborhood level has a return on the property of the area with reference to the year of construction of the property and it is called in English
Market Cap Rate

And the value of the property is determined by
Net annual income divided by the return on property in the area

For the sake of demonstration
Annual rental income from property is $ 1,000
The expenses are 100 thousand dollars
Net operating income is $ 100 thousand
Return on property in the area is 10%
So the value of the million dollar property

And here comes the deception 1 number of multifamily sellers or retailers or even entrepreneurs
They distort or omit spending to increase net annual income and then increase their value

There are some solutions to how to get on it of course (what will I leave you with? )

Solution 1:
Ask for a document called
T12
Which is a document detailing the income and expenses over the past year
And during the due diligence period the buyer management company connects to the management system and verifies the data
If the seller does not have the data that he manages himself and there is no orderly management company
This is the place to buy at a lower price to lower the risk of surprises
And in English call such deals
Deal with hairs

Solution 2:
Take into account that spending is between 50-55 percent of the income received.
And computers accordingly

What to do if the property is empty or less than 90 Occupancy?
Take the average rent per unit and multiply the number of units twice 12
This will give the potential overall annual income
Take down 10% of it
(Because there is always someone who does not pay or that a unit is empty and the like and therefore have to take an empty income percentage)
And this is the potential net annual income
Reduce 50 Percentage of Expenses
And distribute in return on the property in the area
And what is obtained is the potential value of the property
Reducing the cost of renovation needed to rent the units (including outdoors)
And the financing and acquisition costs
And that is the value of the property for Kenya

Did I kill you?
If not… then let's get used to it and write the answers in the comments

Have you received a venture or broker property that explains you the return on the investor is 9%
Property with 65 units occupying 92 percent
Produces the asset from net rent of 538,200 dollars
Spending is 199,134 dollars
Return on property in the area is 6.25%
1. What is the value of the property
2. What is the average rental per unit (I'm a fan)

Write the answers in the comments
And if I exaggerated in a post with a sea of ​​data would also write the word exaggeration

Continue a great week
Rafi

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Responses

      1. @12345mail
        , Happily since the property is over 90% occupied (actually 92%), the value of a property is first considered
        NOI (net annual operating income)
        538200 - 199134 = 339066. Since this amount is 6.25% property yield in the area, we would like to find how much it is 100%
         (339066 * 100) / 6.25 = 5,425,056 Same idea for average unit rent
        Rental income for 92% of apartments is: 538200: If the building was occupied by 100% then rental income for all apartments would have been
        (538200 * 100) / 92
        We will split the result into 65 apartments and we will receive 9000 dollars per apartment.

  1. the answer:
    First of all it was a puzzle perhaps not easy and I may not have been clear enough so sorry then
    Now, one of the common mistakes as I noted in this post is that the seller or broker omits expenses and in that case should consider 50 percentage of expenses (if the income is higher than 90%)
    And therefore worthwhile
    NOI = 538200 / 2 = 269100
    Market Cap Rate = 6.25%
    Market Value = 269100 / 6.25% = 4305600

    As for the average rent - I got smart here but most of you were right
    The income from rent received is 538200 at 92% percent of occupancy.
    That is, at 100% it was supposed to be (triple calculation - some math :))
    538200 * 100 / 92 = 585000
    And the average rent per unit is 585000 divided by 12 months divided by 65 units
    585000 / 12 / 65 = 750

    So in the next chapter… .Alive Property Analysis? Do not know I need to think about it 🙂

  2. Excellent post.
    Quotes you:
    "Every area even at the neighborhood level has a return on the property of the area with reference to the year of construction of the property and it's called in English
    "Market Cap Rate

    You forgot to specify the class of the property
    A, B, C, D

    You should explain this point to your readers