How to Value Apartment Complexes

Question

Hello, BiggerPockets community!

First time poster here!

My name is John. I'm very interested in the idea of investing in apartment complexes, and have thought about it for quite some time, but wanted to educate myself as much as possible before I committed to my first deal. The past few months consisted of heavy research using the internet, reading books, and attending some local real estate gatherings. The goal was to gain a rudimentary understanding of the multi-family industry, and I believe I've achieved that. However, while I've spent the time educating myself, there's one topic that still confuses me, and I was hoping the BP community could provide a comprehensive explanation. That topic deals with valuation.

QUESTION: Better put, how do you know when an apartment complex is over priced, under priced, or exactly where it should be?

I've provided an example below, with what I believe is enough information, and was hoping someone could breakdown why this deal is over priced, under priced, or right on target. I learn best with examples, so an in-depth analysis and step by step breakdown would be EXTREMELY appreciated.

I'd like to take a moment and thank you all in advance for your guidance!!!!!

Information:

Asking Price: $1,295,000

Number of Units: 24

Cap Rate: 7.5%

Occupancy: 96%

Gross Income: $173,862

Total Expenses: $76,412

NOI: $97,450

Extra Questions:

1.  How did this particular example come up with 7.5% as the cap? What formula was used? My understanding is cap rate= purchase price / annual NOI, so did the owner simply take their own purchasing price when they bought their property and divided it by their annual NOI ($97,450)?

2. Are there appraisers that will provide you with this information? If so, is performing your own analysis really required?

3. Does this seem like a fair asking price? Why or why not?

Sam Grooms · Answer

An apartment is priced right when it meets your return objective.

1. Simply NOI divided by Asking Price. Using the numbers you provided, I get 7.53%.

2. If other people are willing to overpay for a property, does that mean you should? Always perform your own analysis.

3. Every market will be different. That might be a great deal in Phoenix, but a really bad deal in Nashville, TN. Even in Phoenix, that might be a bad deal in certain parts of town, and a great deal in others.

It's almost guaranteed you won't be running the property the exact same way current ownership will. So don't focus so much on in place income. Use it as your baseline, but figure out what the income will be when you take over. You need to develop a pro forma and use that to come up with a return on your investment (whether that's cash on cash, internal rate of return, etc). To do that, you'll need to look in to financing options. One financing option could make a deal look great, while others will shy you away from a deal.

My point is, that information is nowhere near enough to decide if the deal is good or not. So much goes in to that decision. @Ben Leybovich and I will spend dozens of hours underwriting a property before determining our price range.

Chris Dowty · Answer

@John Edrisy check out Michael Blank’s 10 minute offer. This will help the numbers make sense. I wouldn’t make any offers off this but a very good quick analysis. Link below. This website is full of good info.  Good luck!

http://www.themichaelblank.com/videos/how-to-make-an-offer-on-a-multifamily-deal-in-10-minutes/

Bjorn Ahlblad · Answer

@John Edrisy welcome to BP and congrats on starting off with a solid post! If that was in my market-western wa-I'd want to look at it further. Those are pretty good numbers, money and number of units, at first glance it is enough to get my interest. I'd want to know a lot more..............age, condition, type of tenant, PM etc. What is the breakdown of those expenses-how accurate etc. Can we get a rent roll, financials, inspection etc. Is it all one building or a bunch of stuff totalling 24 units, whats the mix of number of bedrooms. How firm is the ask, how long on the market, anyway John you get the idea. How much do I have for a down and what kind of loan can I get. Lots of things to consider; this property is worth a second look IMO. All the best!

Bjorn Ahlblad · Answer

@John Edrisy equally important element of price is how's the utilization today and can I re-position the property. Landlords can become tired and complacent over time...............one or more units stay unfilled for an extended period, or rents are left at existing levels due to laziness-it happens!

This benefits you two ways.............lowers the current income which lowers the justification for asking price. Say you can fill those units, or bring rents to market without doing anything or refresh and refill those units and up the income. Or, perhaps it is one of those sought after situations where you can spend 150k over 20 units and raise the rent based on the improvements, and perhaps pull out you equity for the next deal. Lots of potential upside.

You need to know the market, and look into the rent roll and determine if those opportunities exist, or are you losing money due to existing leases-another reason to justify your offer. Long term leases are not the asset some landlords think they are. MF presents a tremendous opportunity leveraged across multiple doors which gives it a strong upside if you have the know how and access to capital.

Sam Grooms · Answer

What if there's $150 per unit per month of in place LTL?

Ben Leybovich · Answer

I disagree with @Sam Grooms that there's not enough information. I think that there is plenty here.

These are basically $600 rentals by the looks of the gross income. If you are concerned with cash flow underwriting, you need to get these at no more than $40,000/door, or you won't cash flow.

Hope this helps.

Josh J. · Answer

Appraisals are not free, and you're not going to pay an appraiser to walk a property before you bid on it so you know what it's worth. Not to mention most sellers aren't going to give you unfettered access to walk every unit on a property and examine all major mechanicals before you have an executed contract.

I'd recommend reading https://www.amazon.com/Complete-Buying-Selling-Apa...

That's a good book on the basics of multifamily investing.

Good luck!

John E. · Answer

I appreciate the responses, gentlemen. Would either of you recommend any courses, books, or articles, that teaches investors how to analyze multi family properties?

The information is so scattered it’s hard to figure out where it begins and ends.

Sam Grooms · Answer

I think the OP is here to learn.

Ben Leybovich · Answer

The OP most likely doesn't know what LTL is. This may be an unfair assumption, but it's the assumption I make. With that said, on a cash flow underwriting basis, this deal doesn't make sense. I stop there :)

How to Value Apartment Complexes

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