All Forum Posts by: Sheldon Peart

Thanks Brian,

We will keep that in mind and consider it while looking for our first property.

Appreciate all the adice.

Sheldon

Hi Immanuel,

Yes you are completely correct here, I don't think I was very clear with my question to begin with. What I was considering NOI was after all expenses paid (or what expenses they have provided me so far) including the mortgage payments. So this was the amount that drops to the bottom line before taxes, which you mentioned in your earlier reply; along with Jacob, that this is actually the COCR calculation. Lots to learn, just like any industry, terminology is a big learning curve!

Thank you for your advice Immanuel!

Sheldon

James,

Thanks for the book suggestions, I will order them right away and develop a more thorough knowledge on this - very appreciated!

Jacob,

Thanks for your detailed explanation, it does appear I was basically using the COCR. Your example clearly explains how to view a property and some variables that come into play and what to watch for. I did notice their expenses were lower then I estimated, also no line item for insurance. They are trying to tell me they don't carry insurance to save on costs..... concerning to say the least. Wonder what else they are trying to save costs on, although they did just replace roof.

I will get more acquainted on the area and the cap rates in the past few years. I do see the value and usefulness on the Cap Rate now after Immanuel, James, and Your explanations. 

Is it out of line to call a real estate agent and ask them to provide cap rates in their areas? That seems like the kind of information they could provide quite easily, also would like to build a relationship with a realtor in that area. The property we are researching is about an hour away from our town in Northern BC, Canada.

Thanks again for all the advice, really appreciate your time. I'm sure I will come back with more questions but will burry my head into some more research and books for now.

Sheldon

Thanks for the reply Immanuel,

Yes you are correct, the property that I am looking at right now is a 9-unit property. It has a cap rate of 6% based on what the seller's price is. 

The reason I viewed the Net Return based on down payment is because its a metric I have used to value other companies in the past. My thought was that you would apply your NOI to the capital you actually used (capital employed), not the total price of the property. My thoughts are that anything above the down payment is paid by tenants, so why would you base your NOI on total purchase price? I guess I am trying to figure out what Net-worth gain we would get back based on the money we initially invested at the beginning. Am I just complicating the analysis by looking at it this way?

Also, in your experience what is a good Cap Rate for a multi-family property roughly this size? Is the 6% reasonable? Sellers price is 35% higher then the assessed value at moment.

I will learn about the other metrics you mentioned and see how I can apply them and which scenario they fit best.

Thanks for the advice, 

Sheldon

Hello,

I am looking for some help/guidance from some experienced investors that are good at valuing a property. My fiancé and I just finished paying off her large med school school debt, and we put a suite in our house last summer that covers our mortgage cost. We are now in a position to start getting serious about investing, we have become much more interested in multifamily properties. I am sure our rationale is the same as everyone else's that gets into multifamily - more tenants to spread the expenses over, less risk overall in regards to vacancy.

What I am curious, and a bit confused over, is how to value these properties. I understand the Cap Rate calculation, but I view that as more of a quick and dirty metric just to determine if the property is worth researching further. Below is how I am valuing properties and would really appreciate if someone could chime in if I am off the mark.

NOI / Capital Employed (down payment) = Net Return

I then break out the Net Return into what would be cash and equity. I have found that these result are all over the map. I have found properties that have a net return anywhere between 7-12% and some that return 20-25%.

Does anyone know what is a reasonable net return? I know it varies with regional area, but just looking for a range that people have found with their experience? I base all properties on the required 20% down payment that the banks ask for. 

Thanks, really appreciate your time,

Sheldon