What has been the most succesful formula you've used to define the value of multi-unit properties for sale?

Looking to evaluate several multi-unit properties in different markets and I would like to get some feedback to see if there's a new formulas or any old ones that you have used had success with in the past. The number of units range from a minimum of ten to a maximum of 30 per building. Your insight would be much appreciated.
Thanks in advance for your quick responses
In Buying Property - Asked by DARRYL R. - Jun 25, 2012
Report Abuse
Answer this Question

Answer(s)

Rob B.
Chandler, AZ

Darryl....
Rather than a formula, I use a process. Formulas can be applied within the steps of the process, but the steps should always be practices. The standards for a decent multi-unit should never be considered new. I use the following in all my evaluations:
1. Location
2. Quality of property
3. Age of property
4. Condition of property.
5. Density of land per unit.
6. Unit mix
7. Cost per unit.
8. Rental rates for specific market.
9. Historical vacancy rate (why high - why low?)
10. Rehab costs if any.
11. Upside potential for performing rehab.
12. Cap rate.
13. Management and cost control.
14. Exit plan timing and basis.
With regard to size, a question has to be asked about how you intend to manage the properties. There is a difference in the laws in most states with regard to when an onsite property manager is required. The size can have a bearing on when to use or not use a property management company.
Good luck and Onward and Upward....
Rob Baird
rob@capratecommercial.com

Jun 25, 2012
Report Abuse
Patrick R.
Owner/Investor
Charlotte, NC

To get a quick "ballpark" estimate of a properties value (based on net income) simply use the CAP rate formula.
Annual Net Operating Income / CAP rate = Property Value
For the properties Value to yourself use the CAP rate you are looking for in your investment.
For the Value on the market use the going CAP rate for other investors.

Jun 25, 2012
Report Abuse
Paul E. W.
Broker/Agent
Livingston, NJ

Dear Darryl - Here's a couple of suggested formulas to gauge approximate value of multifamily. These formulas should only serve as an index and represent a fraction of your respective due diligence process. Hope this helps.
Implied Market Value (Total Assessment Value / Tax Rate) - See local tax records for this data
Income Approach
Gross Rental Income (Annual)
Less: Vacancy Rate
Equal: Effective Rental Income
Less: Operating Expenses
Equals: NOI (Net Operating Income)

Jun 25, 2012
Report Abuse
Erin S.
Rancho Cucamonga, CA

Besides the great answers given by Rob, Patrick, and Paul, you also want to set a benchmark for specific locations and base your results on the benchmark, otherwise how do you know how poor or well your decision is. For example: I may use for Los Angeles County - area specific based upon comps - $85K/door, 7.5% CAP, 6 GRM, NOI >45% of Gross Rents. I am also looking for debt service ratio which really affects your net CAP, and cash return ratio, which tells you how quickly to expect a return in cash. ROI is fine, but I also want to know WHEN I can turnover my investment either back into the property, into another property, or to refinance and pull more capital without hurting my net CAP. Once you calculate the numbers for your selected properties, compare the results to your benchmark for that area. Give or take, 15-20% variance may be acceptable. It's up to your standards. I find this really helps me make decisions that make sense because I don't have any discretionary income to play with or lose. Erin rei@camfunding.com

Jun 29, 2012
Report Abuse
Erin S.
Rancho Cucamonga, CA

Besides the great answers given by Rob, Patrick, and Paul, you also want to set a benchmark for specific locations and base your results on the benchmark, otherwise how do you know how poor or well your decision is. For example: I may use for Los Angeles County - area specific based upon comps - $85K/door, 7.5% CAP, 6 GRM, NOI >45% of Gross Rents. I am also looking for debt service ratio which really affects your net CAP, and cash return ratio, which tells you how quickly to expect a return in cash. ROI is fine, but I also want to know WHEN I can turnover my investment either back into the property, into another property, or to refinance and pull more capital without hurting my net CAP. Once you calculate the numbers for your selected properties, compare the results to your benchmark for that area. Give or take, 15-20% variance may be acceptable. It's up to your standards. I find this really helps me make decisions that make sense because I don't have any discretionary income to play with or lose. Erin rei@camfunding.com

Jun 30, 2012
Report Abuse
Erin S.
Rancho Cucamonga, CA

Besides the great answers given by Rob, Patrick, and Paul, you also want to set a benchmark for specific locations and base your results on the benchmark, otherwise how do you know how poor or well your decision is. For example: I may use for Los Angeles County - area specific based upon comps - $85K/door, 7.5% CAP, 6 GRM, NOI >45% of Gross Rents. I am also looking for debt service ratio which really affects your net CAP, and cash return ratio, which tells you how quickly to expect a return in cash. ROI is fine, but I also want to know WHEN I can turnover my investment either back into the property, into another property, or to refinance and pull more capital without hurting my net CAP. Once you calculate the numbers for your selected properties, compare the results to your benchmark for that area. Give or take, 15-20% variance may be acceptable. It's up to your standards. I find this really helps me make decisions that make sense because I don't have any discretionary income to play with or lose. Erin rei@camfunding.com

Jun 30, 2012
Report Abuse
Gregory G.
Broker/Agent
San Francisco, CA

As mentioned CAP Rate or GRM.
-
Gregory Garver - Commercial Real Estate Broker
Broker License# 01716531
(415)225-9894
gregory.garver@gmail.com
Web Reference: http://www.nnnbrokersusa.com

Jun 30, 2012
Report Abuse
Gregory G.
Broker/Agent
San Francisco, CA

CAP Rate or GRM.
-
Gregory Garver - Commercial Real Estate Broker
Broker License# 01716531
(415)225-9894
gregory.garver@gmail.com
http://www.nnnbrokersusa.com

Jun 30, 2012
Report Abuse
WC Equity Group (.
Owner/Investor
Tampa, FL

Darryl, valuations are hard to narrow down; however, we've found a strategic formula that helps provide insight to value based on returns (not appreciation or comparable value):
(Total gross monthly rent roll x 12) minus annual taxes, minus annual insurance, minus 10% of gross annual rent roll equals "Figure X." Multiply Figure X times 5 and divide that figure by 2. This will give you a rough estimate of what the property will be worth to an income-minded investor.

Jul 16, 2012
Report Abuse
Jeff R.
Lender/Mortgage Broker
Birmingham, MI

When your calculating value on NNN properties, dont forget to still factor in holdbacks, such as market vacancy, market management fees, reservces etc.
The appraiser as well as bank underwriters still factor these in even though they dont really exist on a nnn property/deal. If your not getting financing then it doesnt matter but if you are they will.
I see most underwriters take off 6-9% off of the base rent. You may wan to do the same.
Jeff

Sep 13, 2012
Report Abuse

Welcome to Answers

LoopNet Answers is where the commercial real estate community shares what they know to help each other out. And it's all for free.

Ask a question to get advice from brokers, investors, professionals and local experts.

Answer questions to raise your visibility as a trusted advisor and build new relationships.

Ask a Question

Post Question