How to Analyze Multifamily Investment Opportunities?

value multifamily property

A multifamily property is a residential property with more than one housing unit. Some common examples include town homes, duplexes, condominiums, and apartment complexes. Being a great wealth-building tool, these properties can be a boon for new investors.

Let’s see how to analyze multifamily property opportunities like a professional, along with the benefits and other vital factors. 

What Makes Multifamily Investment Deals Special for Investors?  

Multifamily property renders a slew of benefits to investors. Some of these are as follows: 

1. Significant Cash Flow

Unlike single-family property, multifamily property establishes multiple streams of monthly income. These investments help investors reap consistent and sustainable income for years. Also, investors can shift into one unit and rent out the rest. Those seeking a passive income can use such properties in multiple ways. 

2. More Control Over Value

In the real-estate realm, the ability of a property to reap income and its valuation go hand in hand. The higher the income it earns, the higher the valuation it receives. Since such properties entail various housing units, the rental income increases manyfold. This is something not possible for a single-family property.

3. Larger Pool Of Tenants

One of the prominent advantages of investing in multifamily properties is minimal risk. How so? Unlike single-family units, which are prone to lower income, multifamily properties foster multiple units and thus help earn considerable income. 

4. Tax Benefits

The multifamily property allows investors to access various tax benefits. Investors can save big on their rental income by putting their multifamily property under depreciation.

5. Blanket Insurance Policies

While multifamily properties require extended insurance coverage, investors find these policies easier to secure and negotiate. Insurance organizations have expertise in property types and associated liabilities and help you explore different options. You can group everything under a single policy as your portfolio grows.

Checklist for Selecting an Ideal Multifamily Property Deal

Selecting an ideal multifamily property deal can be taxing for new investors. And since these properties stay in vogue throughout the years, finding the ideal options can be overwhelming. However, the checklist below can help you make an informed decision. 

1. Location

Location plays a vital role in choosing worthwhile multifamily properties. Choosing the right location should be your priority if you expect your property to churn consistent earnings and foster price appreciation with time. These days tenants have become meticulously selective and prefer properties that appeal to them. So, prefer selecting a property that belongs to a high-yield area with well-maintained neighborhoods. 

2. Initial Property Evaluation 

Your next step will be performing a detailed property evaluation. This may involve looking into key areas such as overall floor area, parking facility, road connectivity, sewage quality, number of housing units, power backup, etc. 

3. Potential Income

The next step is to estimate the worth of the property in terms of its ability to reap consistent income. It may seem simple, but it’s not an easy feat to do so considering the number of factors involved. Team up with an expert firm like Beach Front Property Management to stay atop any estimation nuisances. 

4. Costs

The path to financing real estate, particularly multifamily properties is convoluted. Investors may opt to reside in one housing unit while renting out the rest, allowing them to secure owner-occupied financing. This means that that stream of income coming from the renting units will be considered in the lender’s qualifying ratio. Investors must also take their credit score into account while analyzing financing options. This number shall play a vital role in the qualifying process. Lenders will take a closer look at three parameters: Credit, down payment, and debt-to-income ratio. 

5. Seller

There is one more important concern while analyzing potential multifamily properties-“ the Seller”. The purchase price can significantly vary based on the seller and their motivation. So, investors must clearly comprehend whom they are dealing with. Bank-owned properties are not identical to sale-by-owner properties. 

How to Value Multifamily Property : 6-Step Guide

Once you have found a suitable property, your next step should be accessing how much profit the property can generate. The following steps will let you do the same with ease. 

Step One: Dig Down the Purchase Price

Determining the purchase price commences with evaluating the property value vs. its asking price. Start with performing a comparative analysis of various properties in the same region. For accurate results, consider similar properties and drill down their valuations in detail. This way, you can easily find out whether the price of the selected property is justifiable or not. 

Step Two: Explore the Financial Data

The purchase cost doesn’t always equate to the net cost of the property. You need to peel off extra layers to unlock the exact price of the selected property. The overall cost of the property also involves repair expenses and closing cost that comprises taxes, loan application fees, attorney’s fees, etc. 

So, in addition to the down payment, you also need to cater to these expenses while paying for your selected property. 

How much money a property can generate in general?  

The exact worth of any rental property revolves around its ability to reap monthly rental income. Your property can reap passive income from laundry facilities, parking, vending machine sales, etc. 

How to deduce the exact cost?

Approach the seller and prompt him to provide pro forma relating to projected expenses and income. You will require this to figure out an accurate estimation. Note that not all sellers can provide exact figures concerning occupancy rates and market rents. With that in view, ensure that the pro forma offered by the seller encloses historical data, rent roll, P&L statements, etc. The rent tools render information about vacancy and occupancy rates. And beware of excessive vacancy rates and turnover.

Take note of projected expenses

The projected expenses comprise management expenses, taxes, insurance costs, landscaping expenses, and utility costs. Instead of entirely relying on the pro forma information, prompt sellers to provide you with the preceding year’s tax returns. Do not forget to check the variable like tax assessments. 

Step Three: Compute Overall Operating Income

As an investor, it is of paramount importance for you to figure out the overall operating income of the property that does not entail financing expenses. Here’s the mathematical expression to calculate the net operating income:

Net Operating Income = Income (rent, parking, etc.) – Operating cost comprising expenses relating to taxes, management, insurance, maintenance, and so on

Irrespective of how many financing options you have, make sure to drill down every multifamily investment option available to you. 

Step Four: Estimate the Cash-Flow

Mathematically, cash flow is equivalent to the difference between the Mortgage Payment from the Net Operating Income.

Cash flow= Net Operating Income – Mortgage Payment

Mortgage payments entail principal interest. The prevailing tax slabs and mortgage insurance are also taken into account. 

Step Five: Examine How Much ROI you Will Earn

Once you are assured that your cash flow isn’t negative, compute how much ROI you can earn. To do so, make sure to use the following mathematical expression.

ROI = Cash flow / Investment Cost (down payment + closing costs + rehab costs)

Therefore, to fetch better ROI, you need to keep the down payment as low as possible. 

How to figure out the ROI for a multifamily asset? 

The ROI you can reap from your multifamily asset can fluctuate are the marketing conditions. But some money managers suggest an ROI of 8% is an ideal figure in the status quoTime can make a significant difference in this regard. You can expect a considerable rise in ROI with time, provided the condition of your property stays immaculate. 

Step Six: Calculate the Net ROI

There are many factors that you need to take into account to deduce the net ROI. These may include the following: 

Tax benefits from tax deductions

  • Equity build-up over time
  • Increased property valuation

Here’s the formula for calculating net ROI

Total ROI = Total Return / Investment Cost

What About Underwriting Multifamily Properties?

In the real estate context, underwriting is known as a process where the loan application undergoes a vetting process to determine the risk threshold in the investment. It helps a lender to decide whether to approve the loan. If you want to avert the lender’s rejection, ensure you understand how to analyze multifamily investment opportunities in detail.  

Contact Beach Front Property Management: Find Profitable Investment Opportunities

Multifamily investment properties are worthwhile investment options for all kinds of investors. But to get the best deals, you must tick all the boxes, consider every parameter, and get right with your budget estimation and credit qualification. Given how convoluted it is to deal with such properties, it’s better to seek assistance from someone well-versed in real-estate dealings. The company like Beach Front Property management has spearheaded the real-estate business for the last two decades. They know exactly how to find and evaluate the property with utmost accuracy and professional know-how. Let Beach Front Property management be your partner if you want to crack the best deal in one go. 

Trevor Henson

Trevor Henson is an experienced entrepreneur (10+ highly-successful start-ups) and property investor with a demonstrated history of building and leading teams in investment property management environments, maximizing returns for property owners, and optimizing properties through construction management and re-positioning. He…
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Frequently Asked Questions(FAQs)

Although no standard figure can justify how much ROI one can reap via multifamily investment, experts recommend a rate of 8-12% ideal for such properties. Of course, this number can vary in accordance with the prevailing marketing conditions.

Cap rates are arguably one of the most recommended investment metrics. Computing a good cap rate for multifamily investment is largely subjective. It typically depends on the local market. For instance, the average cap in high-valued locations maybe 4 percent or less. The cap rate also varies as per how good the quality of the property is. Class A multifamily properties typically adhere to lower cap rates as compared to Class B and C properties. With that being said, a good rate for such properties is a minimum of 4%, which can go up to 8-12%.

In the context of apartment complexes, the turnover is the number of apartments in which tenants moved out of the property during the 12-month timeline as a percentage of overall rented units in the building.