Multi-Family Property Analysis

[Kyle Brown]

What are the crucial factors to look for when analyzing a multifamily?  How important is the time it will take to pay off the property? I recently started including the cap rate in my analyses to determine if the property could be a good deal.  I just want to make sure there are no loop holes in my analysis.

[Jeff Copeland]

I'm curious as to why you only "recently started including the cap rate in [your] analyses", as if it were an afterthought?

The cap rate is the single most important number to consider when analyzing a multifamily property. The cap rate allows you to measure and compare the property's performance (and potential performance) as an investment compared to other properties, and compared to dissimilar investment opportunities (such as stocks, bonds, precious metals, etc).

The cap rate is also the primary determinant of a rental property's value. Want to raise the value? Raise the cap rate - because that's what multifamily buyers care about when analyzing/valuing a deal and comparing it to other options.

Cash on cash return is specific to you and the amount of cash you have in the deal. Different types of financing and down payment amounts will change this number - but that is primarily determined by the amount of your specific cash outlay (which could be anywhere from 0% to 100% of the purchase price), not the property's performance.

Similarly, monthly cash flow really only matters as it relates to the total acquisition cost. $500 NOI every month would be awesome on a $50k investment (that's a 12-cap!), but it would be terrible on a $500k property (that's a 1.2% cap). In other words, the cap rate is what really matters....not the cash flow. 

The cash flow (NOI) is just the numerator in the equation, you have to finish the math.

As far as the time to payoff the property, this is generally measured by calculating the Gross Rent Multiplier. Lower (quicker) is obviously better, but really only useful when comparing one property to another. It's one factor to consider, but the cap rate is king.