A 50 unit Multi-family deal analysis

[Bradley Jernigan]

A 50 unit MF apartment is currently 90% occupied with rents averaging around 1000. If the cap rate of the area is around 6% and operating expenses are around 40% of the Total Gross Rental Income then what is a rough estimate of what you should purchase the property for?

1: Calculate the NOI: To calculate the NOI we will first begin with calculating the Total Gross Rental Income.

Total Gross Rental Income = 50 units * 1000 rents * .90 occupied * 12months = 540,000$

Assuming there is no other Additional Income at the property then let’s assume Operating expenses is going to be around 40% of the Total Gross Rents.

Operating Expenses = Total Rental Income * .40 = 540,000 * .40 = 216,000$
NOI = Total Rental Income - Operating Expenses = 540,000 - 216,000 = 324,000$

2. Use Cap Rate to calculate Purchase Price: Now that the NOI has been calculated, divide the NOI by the cap rate.

Purchase Price = ( NOI / Cap Rate) = ( 324,000 / .06) = 5,400,000$

Therefore, with assuming a 6% cap rate and 40% operating expenses, the seller would be looking around 5,400,000$ for the property. Understanding these metrics, can also, help better asses the potential profitability and risks associated with a property. Of course this is a rough estimate and other factors can contribute to either a higher or lower purchase price.

[Charley Gates]

Hi Bradley,

I would not recommend using the prevailing cap rate to establish the purchase price.  Instead, I would do the following:

1)  Establish property performance during your anticipated hold period including a projection of income, expenses, and cap ex to establish a series of annual cash flows. Keep in mind that nailing rent projections is critical.  Rental income disproportionately drives property performance.

2)  Establish a sale value at the end of the hold period and incorporate these sales proceeds into the cash flow analysis that you developed in #1

3) Establish values for the "big three" performance metrics that would be acceptable to you given the level of risk that you are assuming with the acquisition: cash-on-cash return(CoC), IRR, and MOIC (multiple on invested capital)

4)  When you have projected the cash flows that that property will produce, and established what returns are acceptable, then you can solve for the purchase price

I hope that this helps.

Good luck with the analysis possible acquisition.