Small Multi-Family Question (7 unit)

[Chris Lawrence]

I currently own single family rentals and I'm looking at a 7 unit apartment building (multi-family is foreign to me). I believe its currently under valued with gross yearly rents at $51,060 and I believe I could conservatively increase gross yearly rents $79,200. Looking for some insight on how banks value these properties as I could purchase for 440k but I believe I could increase the overall value of the property, but I don't know how to quantify that. Looking for any insight. Thanks!

[Pat G.]

@Chris Lawrence Great question and great advice. It is cool that you are jumping right in, but a little knowledge can help. Here is a little formula to use for multifamily:

GPRI (Gross Potential Rental Income)

- Vacancy (5%) -minimum bank is going to use -depends on market area may be higher.

- Concessions (what you have to give away to get people to move in, or loss to market rents)

= Total rental Income

+ Other income

= Effective Gross Income

- Expenses - (50% at the least for Apartments)

= Net Operating Income (NOI)

Then take your NOI and divide it by your CAP rate to get a rough value of the property.

Then you add in your debt service costs to get cash flow.

Hope it was not too long winded. 

Good Luck