How to effectively evaluate an out of town multifamily property

Question

I've bought and sold a couple SFHs here and there, but I recently read Rich Dad Poor Dad and I am pumped and ready to actively pursue real estate investing. I've been reading a lot about multifamily properties and I expect that it has its own issues but it seems like the way to go.

To find what I am looking for I may need to look outside my immediate area, so if I am looking at a property in an area I am not familiar with, for example, in Calhoun, GA:

• I've consumed a lot of content over the last six months and understand calculations of CAPS, NOI, COC, IRR etc etc but I don't understand how to find the right comps for a property I'm considering? I can't look up the recent comps like I can for single family homes.
• When looking at a listing how do I determine if I can add value (increase rents, make improvements, etc) to get a B class up to an A class property, or a C to B? 
• How do I feel confident in my calculation of the purchase price and market analysis? Broker calculations of CAP rates seem to be all over the board, is there a way to verify rent roll, etc?

I have always been a learn as I go kind of person, doing most of the work myself so I know how it’s done. However, the stakes for these properties are a little higher and I have a family now so I want to be a little more cautious and prepare myself as best as I can.

Thank you for taking the time to read and respond.

Taylor L. · Answer

We don't look at comps in the same way that the single family folks do. You need to learn what the market rents are in your area of interest so that you can identify when a particular property has potential upside. You can look for upside in the rents if there are similar units in a similar area renting for more. Sometimes the difference will be the finish or amenities, which you can change by spending some money and upgrading the property.

Broker calculations are usually magical handwaving that paints the absolute best possible picture of the property you can possibly imagine. You can check some of their work by calling the leasing office and inquiring about potentially renting a unit. See if they have units available, what rents they quote you, things along those lines. It also helps if you can drive the property and see the neighborhood. The broker's package is going to paint the best possible picture of the neighborhood, which many times isn't true.

We're in a tight market in multifamily right now, don't be surprised if you get outbid by buyers offering terms you can't believe. Stick to the numbers!

Sunny Abbasi · Answer

Thank you so much everyone for the advice. I really appreciate it! have a few followup questions and would love to hear your thoughts.

1) There are a lot of factors to consider when evaluating a potential property. Do you guys recommend any specific approach  as far as doing a quick assessment prior to making an offer and deep dive after the offer/property is under contract,  to make the evaluation process more efficient and systematic.

2)Any thoughts of some possible tested exit strategies that you follow and reasons as to why you prefer one over the other?

3)Any other tools that you guys recommend for market research. I am primarily looking at Loopnet comps (very limited data and timing consuming), Zillow , Realtor and MLS rental data and Rentometer.

Thank you for your time!

Tj Hines · Answer

@Sunny Abbasi

• I've consumed a lot of content over the last six months and understand calculations of CAPS, NOI, COC, IRR
 etc etc but I don't understand how to find the right comps for a 
property I'm considering? I can't look up the recent comps like I can 
for single family homes. (The value lies in the NOI (5+ units). The more you can increase the bottom line NOI, the more you increase the value. More so you need to find out what properties that are similar to yours are trading for per door. Also finding out at what cap rate communities similar to yours are trading for you help you determine the value of the building. A knowledgeable broker in that market, should be able to assist you with this)
• 
• When looking at a listing how do I 
determine if I can add value (increase rents, make improvements, etc) to
 get a B class up to an A class property, or a C to B? (To know if you can increase rents, you need to find out what the competition are renting their units for and why are they potentially commanding a price higher than yours. Are their units upgraded and yours not? You need to justify your research with a localized property manager in that market. They know what units according to their condition should rent for. This is how you determine if you take a C to a B in a B or A area)
• 
• How do I feel confident in my calculation of the purchase price and market analysis? (See above 2 answers) Broker calculations of CAP rates seem to be all over the board, is there a way to verify rent roll, etc? (You can request for the sellers to provide you with 6 or 12 months of prior bank statements. Or ask for seller to provide tax returns for the previous 2 years)

Greg Dickerson · Answer

As @Taylor L. mentioned you can learn a lot about the market and the property through online research. Look at tenant reviews, crime rates, demographic reports, neighborhood scores etc.

Call other apartments close by and ask them about vacancy, the area etc.

Finally you can talk with Managemnet companies and find out if they think there is a value add play and what they would do to improve the property to make it more competitive.

How to effectively evaluate an out of town multifamily property

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