How do you put a value on a multifamily property? Is there a formula that says "this is how much it's worth"

In Buying Property - Asked by brian r. - Jun 5, 2009
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Answer(s)

Duke A.
Owner/Investor
Bronx, NY

You divide the net operating income by the cap rate but to determine the net operating income you have to find all the income and expense statements

Jun 5, 2009
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Frank A.
Broker/Agent
San Diego, CA

There is no really simple answer. It depends on the size of the property (number of units). Condition, income (current and potential), and of course Location.
Give me some specifics and I can get you a better answer.
Frank

Jun 5, 2009
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David A.
Corporate Investor
Rock Hill, NY

The quickest method to determine the value multifamily is 10 times the net operating income. this is for larger properties of 5 families and up.
Contact me for info
David

Jun 7, 2009
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Paul S.
Broker/Agent
Glendora, CA

Brian
There are a lot of things that determine the "value" of a given property. What has value to you may not to others. In any given market area there will be a "going" cap rate. Cap rates will differ from place to place. The hotter the market got in the past the lower the cap rates went. Now that some sanity is returning cap rates are going up. Keep in mind that cap rate reflects the relationship of the income to the price without debt. If the net operating income (NOI) ramains the same, and prices fall, cap rates go up. Rents in many areas are declining as well which also raise the cap. Use cap as a guide to the value of a property relative to the other similar properties in a given market. You must decide for yourself what factors will cause you to deviate from the "going" caps. Does the property have a great upside and therefore the return now is low compared to what it could be? Is the property priced on the future cash flows and therefore overpriced relative to what it is today? Is there something going on in the community that will cause an increase or decrease in supply or demand (Gap)? How strong is the economy of the city where the property is located? Has the property been mismanaged and do you have a plan to do it right with a resulting higher net income? Is it in an area with high crime, high vacancy, a huge inventory of cheap foreclosed homes (like Las Vegas) that will allow renters to buy? The list goes on and on. If you are using cap a your gage, figure the NOI on what it will be for you not the seller. The seller frequently has different costs than you will (they frequently understate their costs) and therefore have a different resulting cap rate. If you are looking a multiple properties and trying to decide which one is best, keep in mind cap only measures 1 year and does so without debt. If you really want to see how a property might perform you need to look at internal rate of return (IRR). IRR will measure variable cash flows over multiple years, cost of purchase and sale, and will also take into consideration debt service which cap does not. Using a gross income times a factor is a poor way to determine value. Here's an example: say the property generates 10,000 in rent gross X 10= $100,000 value. If the property has 25% expenses or $7500 net and the going cap rate is 8% the value is $93,750 and if the cap is 6% the value is $125,000. As you can see the gross times some factor is way too simple.
If you have something specific or if you need more general informantion call me at 800 554-7362 or email me at paulsylvester@remax.net.
Paul Sylvester, CCIM

Jun 8, 2009
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Paul S.
Broker/Agent
Glendora, CA

Brian
Correction to my answer about cap rates. I stated that if prices fall and rents stay the same the cap goes up. That is correct. I then said rents are falling in many market areas which will also raise the cap. That is incorrect. As the rents go down the cap goes down if the price stays the same. In other words the income relative to the price is lower. In all likelyhood however if the rents are going down the prices will soon follow which will again alter the cap.
Paul Sylvester, CCIM

Jun 11, 2009
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Leslie H. C.
Broker/Agent
Austin, TX

From Texas Apartment Brokers – “The Multifamily Experts”

All of these answers are great. If you want a down and dirty drive by method to determine if you would buy the property before doing the detailed financial analysis use a per door method. Do a search on www.LoopNet.com to determine the range of price per door properties near and similar to the subject property. If the average for a similar property is $50,000 per door and you have an opportunity to purchase for $40,000 per door, this may be an opportunity. If you are new to the business I suggest you find a qualified Apartment Broker that can help with the fine details. You can do your own drive by and get a feel for the area and the condition of the property. Once you have looked at 50 to 100 deals, you will be able to see the opportunity quickly.
www.TexasAB.com

Jun 13, 2009
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