Methods Experts Use in Evaluating Multifamily Deals
Multifamily property investing is attracting more and more interest, leading to increased demand. How do you quickly value deals to see if they’re worth making an offer on, and how do you know how much to bid?
More and more stock market and single-family rental investors want to step up to multifamily property investing. One of the most significant steps to tackle in this process is swiftly sifting through the property leads to know how much they are worth and to know which are worth pursuing.
Simplicity is Key at the Start
Whether you are browsing the web, having agents and brokers sending you deals, or driving neighborhoods, you can have a lot of potential deals to look at, and little time.
Having a quick gauge for knowing whether to toss it or dig in can help a lot. What information you accumulate and review, as well as what data you have access to, will vary from deal to deal. Personally, I love back-of-the-napkin math. It can save you time in the event the seller is asking way too much—or conversely, in the event it is a steal that you need to get under contract immediately.
For this, you just need to know your:
- Potential rents
- Approximate operating expenses
- Cost of any financing, if you need it
Luckily, I have a partner who specializes in all things financial. He’s the one who does the real work in evaluating multifamily deals for our real estate investment firm.
When we speak with a owner, or a broker emails us a deal with limited information, we pull it all into a spreadsheet, which you can find here. Some line items and factors will vary depending on the property location, year built, etc.
Additional items to consider during underwriting include:
- Vacancy rates
- Repairs and renovations
- Asking price
- Property management costs
One way we’ve found to quickly rule out or spot hot potential deals is by looking at current expenses. As a general rule, a Class C property in a C neighborhood will generally run a 50-55% expense ratio. If an owner tells us he is running at a 25% expense ratio for that type of product, then something is off. Most likely, their books are cooked. Not always, but most likely. Unless everything else makes it a must-have deal, you may just want to move on. On the other hand, we’ve spotted deals where the current expenses are more like 75%. That doesn’t mean it is a bad property. It can mean there is huge room for improvement and a lot of hidden value if you can get it for a good price and boost performance.
To make a quick decision, you’ll be looking at things like cap rate, NOI, and your annual returns for the first year.
When you are looking at hundreds of deals, quick analysis can save you tremendous time. After running the numbers, we then formulate an offer to present to the seller. Sometimes we’ll begin by submitting a letter of interest (LOI). This really comes into play when you aren’t sure the seller is going to like your offer and you don’t want to do all the extra work unless you can get close to an agreement.
In others cases, we go straight to contract. At that point, we go deep into due diligence and obtain bank statements, rent rolls, conduct inspections, etc. All the documentation and hard facts will hopefully confirm our assumptions and verify the numbers. If you can get all this information beforehand, it’s even better. Just know it can be a lot of work and can cost money, and you might not even get under contract. Many sellers aren’t going to want to share their finances with everyone in the world, unless they are in a serious contract.
Article Resource: Bigger Pockets