Evaluating ROI on a Multi Family

[Nick Schulze]

Hey everyone, I'm in Bucks County, Pa and starting my investing career by house hacking. We all know the phrase, paralysis by analysis, and I would like to avoid that as much as possible. I have been doing my due diligence with understanding how to put a value on a multifamily home, but I was hoping I could get some extra support from this amazing community. What are the steps that you take when investing into a multi family home??

[Account Closed]

Originally posted by @Nick Schulze:

@Bob Bowling I have been researching for the market cap rate for the targeted area, but I am having no luck. How would one go about evaluating the Market Cap Rate?

There is no reliable source for cap rates for small residential properties.   Because they are not encumbered by long term above or below market leases you can use better valuation methods like direct sales comparison.  You'll see fake investors telling you cap rates but when asked to see their calculations they can't or it will be with some operating expenses excluded and some non operating expenses included so the calculation results in a CRAP rate. 

If you want a double check using an income approach use Gross Rent Multipliers, GRM. As long as you use comparable properties your expenses should be similar as well as rents. If the market is paying 12 times gross rents then 12 times your gross rents should get you close to market value.