how to find comps for 6 unit

[Mannan Razzak]

Hi all. Im finding it very difficult to find comps for a 6 Unit building we are looking to purchase. I cant find anything on zillow or trulia. Appreciate your help. 

[Jorjio Hopkins]

Hi @Mannan Razzak,

@Scott Mac is correct. Anything over 5 units is considered commercial real estate and is valued based on the income, expenses, and the local CAP rate.

Here is a quick break down of how to calculate this for a 6-unit property.

1) Find the Annual Income of the 6 unit.  You can do this by either contacting the broker or seller and asking what the rents are for each unit (Later in the process you'll want to verify these rents by asking for a "rent roll" and getting the actual leases to those units to make sure everything lines up).

2) Determine the Annual Expenses using the 50% rule, which states that typically the expenses will amount to about 50% of the Annual Income.

3) Calculate the Net Operating Income or NOI = (Annual Income - Annual Expenses)

4) Determine the CAP Rate. Hopefully it’s listed for the property, but if not you can find it a couple different ways.

- If you know the asking price then you can do (NOI / Asking Price) = CAP Rate

- If price is not listed then you can look for active brokers in your general area with apartment listings and give them a call. Take this as an opportunity to start build a relationship with them (key for future business success) and casually work into the conversation ‘what’s the cap rate in this area?’

5) NOI / Cap rate = Purchase Price

If you already have all the information present then the above only takes about 45 sec.

If you want to compare the Purchase Price you determined to the seller’s asking price, if it’s listed. If it’s not listed then pull up a tax assessment on the property to get a ballpark number of the assessed value.

Typically if the purchase price I calculate is within 25% or less of their asking price then I dive deeper into the property evaluation.

Example for the 6 Unit:

Annual Income: $72,000 (The owner tells you each unit rents for $1,000/mo)

Annual Expenses: $36,000 (50% Rule)

NOI: $36,000 (AI - AE)

CAP Rate: 6% (You found this from a local broker)

Purchase Price: $600,000 (NOI / 0.06)

Seller's Asking Price: $660,000

With this example your calculated Purchase Price is within 10% of their Asking Price, so I would dive deeper, find more information from either the broker or seller and pursue as an investment if all else checks out.

Good luck Mannan, I hope you get yourself a new 6-unit property!