Multifamily Valuation Help Request

[Sheldon Peart]

Hello,

I am looking for some help/guidance from some experienced investors that are good at valuing a property. My fiancé and I just finished paying off her large med school school debt, and we put a suite in our house last summer that covers our mortgage cost. We are now in a position to start getting serious about investing, we have become much more interested in multifamily properties. I am sure our rationale is the same as everyone else's that gets into multifamily - more tenants to spread the expenses over, less risk overall in regards to vacancy.

What I am curious, and a bit confused over, is how to value these properties. I understand the Cap Rate calculation, but I view that as more of a quick and dirty metric just to determine if the property is worth researching further. Below is how I am valuing properties and would really appreciate if someone could chime in if I am off the mark.

NOI / Capital Employed (down payment) = Net Return

I then break out the Net Return into what would be cash and equity. I have found that these result are all over the map. I have found properties that have a net return anywhere between 7-12% and some that return 20-25%.

Does anyone know what is a reasonable net return? I know it varies with regional area, but just looking for a range that people have found with their experience? I base all properties on the required 20% down payment that the banks ask for. 

Thanks, really appreciate your time,

Sheldon

[James E.]

@Sheldon Peart to piggy back off of @Immanuel Sibero, congrats on getting those bills paid off! Big exhale.

Also as Immanuel mentioned, I've never seen the metric you're using. If you're looking at 5+ units, you want to compare across cap rates (NOI / purchase price) and opportunities to add value, increase rents, and decrease expenses.

There's a few books you may want to read to get a better sense of how to evaluate and manage multifamily properties, and then ask around on BP for more market / property specific questions. 

- What Every Real Estate Investor Needs to Know About Cash Flow... And 36 Other Key Financial Measures

- Multi-Family Millions

- ABCs of Real Estate Investing

- Best Real Estate Investing Advice Ever