How To Achieve Impressive Multifamily Valuations Compared To Residential Real Estate
Impressive Multifamily Valuations
Multifamily properties are valued based on the Net Operating Income of the property applied against the applicable cap rate for your market and type of property.
Net Operating Income (NOI) = Total Revenue less Total Expenses (not including debt service or capital items)
Simplified example. Let’s assume the following;
- Total Income = $1,000,0000
- Total Expenses = $500,000
- NOI = $500,000
- Cap Rate = 5%
- Valuation = $10,000,0000 ($500,000/5%)
Now let’s assume new ownership is able to increase revenue by increasing rents by 2% and is able to reduce expenses by 1%.
- Total Income = $1,020,0000
- Total Expenses = $495,000
- NOI = $525,000
- Cap Rate = 5%
- Valuation = $10,500,0000 ($525,000/5%)
By increasing NOI by $25,000 per year, the property is valued $500,000 greater.
Residential homes are valued based on comps in your neighborhood. The valuation will be based on recent sales in your area adjusted for things such as location, property size, square footage, year built, level finish out, number of car garage, pool, cul de sac, etc. If you buy a residential home for an investment, the opportunity is to find a deal that is way below other home valuations in the area.
With multifamily, the ownership group has the control to implement the business plan to either increase revenue and/or decrease expenses which forces appreciation in the property. That’s one reason I highly prefer multifamily over single family. Valuations are not dependent on the recent sales of surrounding properties.
Why do I share this story with you?
I believe there are many investors that don’t know the difference on how multifamily is valued as compared to residential real estate. If you haven’t considered multifamily in the past, you may want to start educating yourself and learn about different ways you can get involved.
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