Analyzing ARV of a 6 Unit

[Luke Tetreault]

New to multi family investing and just curious how you go about calculating your ARV of a 6 unit specifically. I have a deal with great value add opportunity, but I'm not sure how to calculate it to figure out what my by price and rehab budget should be. I would be looking to BRRRR this property due to purchasing all cash with a PML. There are very few multifamily properties in the area, and none that are remodeled and updated. I believe multifamily appraises based on actual income of the property? Ive done plenty of single families, duplexes, and triplexes. Just trying to transition into some bigger deals. Thanks for any info!

[Jeremy Taggart]

@Luke Tetreault There are a lot of nuances to this, but high level it depends on the NOI (net operating income) of the property once rehabbed/stabilized and the market "cap rate" of where your property is located. If you have both of those numbers then you can back into a "market value". The general forumula being NOI divided by Cap rate equals property value. A "cap rate" is generally what is considered the return you would get on a multifamily property in that area without having a mortgage on it. Typically that number is higher in low end areas, and lower in high end areas. The rationale there being higher end areas are less "risky" so investors are willing to accept a lower return on properties there. Market cap rate is a somewhat subjective measure and appraisers might not all agree on what it is. The best way to find this out is to speak to investors doing 5+ unit multifamily or commercial brokers. You can also try and back into a cap rate by looking at what comparables sold for if you are able to see the financials on those properties.

The NOI is going to be calculated by taking your net income after all expenses without accounting for your mortgage or major capex items. A good rule of thumb is to assume 25% of gross income for expenses if you don't have actual numbers. These will cover your vacancy, maintenance, and property management. This will obviously vary but good rule of thumb. You will also want to subtract property taxes and insurance costs. This will give you your estimated NOI to use for the calculation. Take both of those numbers into account and you should be able to get a pretty good idea of value.

As for lack of comps that can be risky business on the back-end refinance. I always feel more confident going in knowing there are comparable multifamily the appraiser can use in the immediate area ideally. If there aren't they may either go into similar towns that are further away or start trying to compare it to other commercial property types that are similar like a mixed use building. Hope that helps!