CAP Rates & Rehab for Multifamily Properties

[Matthew Allen]

I've been doing single family flips, wholesales and picked up 2 rentals over the last 2 years. After getting a Commercial lead that ended up not working out, but was a toe-in-the-water experience for me, I've started looking at Multifamily, CAP Rates, and the like. I know CAP Rates are only a quick reference, but how do you "quickly" factor in the expenses to rehab a property showing high CAP rates, or do you treat that like you would on SF flips/rentals where you deduct rehab costs from the Purchase Price (which I don't think is how it works)? I appreciate the input.

Matt in San Antonio

[Michael Le]

It doesn't work the same way like SFR. You don't do 70% ARV minus repairs or anything like that. The underwriting is more complicated but not too hard. However, in the end it is a similar concept in that you need to find out what value you can bring to property up to. In SFR that is done just by fixing up the property to match the surrounding comps. In MFH it is done by increasing NOI (part of which is bring your property and rents to match surrounding comps).

I would suggest getting Rod Khleif's free book and reading through it.