Analyzing Property Value for Multi-Family Units

I've underwritten over a thousand real estate deals over my career, here are the 2 biggest mistakes I see passive investors make when evaluating multifamily investments: #1 They fully trust sponsor numbers #2 They focus on returns without considering the risks Until they realize the deal isn't performing as promised and they get a capital call. Here's how to analyze properties like an experienced investor: 𝗦𝘁𝗲𝗽 𝟭: 𝗟𝗼𝗼𝗸 𝗮𝘁 𝘁𝗵𝗲 𝗜𝗥𝗥 IRR is your most important return metric. It factors in the time value of money. If sponsors only show average annual rate of return ("AAR") instead of IRR, that's a red flag. Always ask for it. Value-add deals typically present 15%-17% IRR. ___ 𝗦𝘁𝗲𝗽 𝟮: 𝗣𝗮𝘆 𝗮𝘁𝘁𝗲𝗻𝘁𝗶𝗼𝗻 𝘁𝗼 𝗬𝗲𝗮𝗿 𝟭 𝗚𝗣𝗥 This single factor impacts IRR more than anything else. Some deals assume 100% of units hit post-renovation rents on day one. Completely unrealistic. Red flag: If sponsors assume >3% rent growth in year one based on recent growth numbers, they're being aggressive. __ 𝗦𝘁𝗲𝗽 𝟯: 𝗖𝗵𝗲𝗰𝗸 𝘁𝗵𝗲 𝗘𝘅𝗶𝘁 𝗖𝗮𝗽 𝗥𝗮𝘁𝗲 This determines your resale value and is the #2 factor impacting IRR the most. Many deals assume cap rates compress by 50+ basis points after 5 years. That's aggressive. Compare their assumptions to long-term market trends and historical data. __ 𝗦𝘁𝗲𝗽 𝟰: 𝗦𝘁𝗿𝗲𝘀𝘀 𝗧𝗲𝘀𝘁 𝗥𝗲𝗻𝘁 𝗣𝗿𝗼𝗷𝗲𝗰𝘁𝗶𝗼𝗻𝘀 Every deal assumes rent increases after renovations. But can people actually afford them? Compare proforma monthly rents to 30% of monthly median household income. If higher, leasing will be difficult. Also check: Population growth + job growth = future rent support. __ 𝗦𝘁𝗲𝗽 𝟱: 𝗘𝘃𝗮𝗹𝘂𝗮𝘁𝗲 𝗥𝗶𝘀𝗸 Don't chase high returns without understanding the risks. Check: - Market conditions (new supply, historical and current submarket occupancy, diversity of employers) - Type of debt - Exit assumptions - Reserves collected for unexpected expenses or drop in occupancy Ask sponsors for stress test scenarios. __ 𝗦𝘁𝗲𝗽 𝟲: 𝗞𝗻𝗼𝘄 𝗪𝗵𝗼'𝘀 𝗠𝗮𝗻𝗮𝗴𝗶𝗻𝗴 The property management company is as important as the deal itself. Ask: - How long have they been in business? - Do they have experience with this property type? A company that only manages single-family homes won't know how to run a 100-unit building. __ Did I miss anything? What would you add?

LinkedIn Challenge Day 2 of 10 How Apartment Deals Are Analyzed (part 1 of 2) For those of you who don't know me, I've acquired 3,000 apartment units over the 25 years I've been investing in real estate. Below are the steps I go through when analyzing apartment deals: Step 1: Calculate the PROFORMA/ Stabilized VALUE of the Apartment This is the value of the apartment once it achieved market rent and its operation is stabilized. To calculate the value, you need the gross proforma rent, the age of the building and the MARKET CAP RATE. For example, if the current rent is $1,000 a month but it's the market rent is $1,300/month for a 100-unit, 50-yr old building in a 7% cap area, below is its proforma value: Proforma Value = [$1300x12x100 units x (1-50% operating expense ratio)] divide by 7% cap = $11,142,857 If the asking price of the property is way higher than its proforma (or future) value, I sometimes don't even proceed to step 2. For example, if the asking price is $15M, I don't even negotiate and waste my time because I need to offer BELOW proforma (or below $11M) to make money on the deal. But let's say the asking price is reasonable for example, $9M and to increase the rent to market rents, I need to spend $10K per unit in renovation or $1M for an all-in cost of $10M, then I will proceed to step 2. Step 2: Calculate the Returns from the Property There are 2 returns or profit centers from any property: Cashflow; and Profit from resale Let's calculate number 2 first. When I resell the building, say in 5 years, I will net approximately $1M ($11M+ less $10M). Now let's calculate the cashflow. Let's use interest only financing to make the math simple. Let's say the interest rate is 8% and I put down 20%. How much will be my cashflow? Cashflow = NOI - Debt service NOI (proforma) = $1300x12x100 units x (1-50% operating expense ratio = $780,000 Debt service = $10M all-in costs x (1- 20% downpayment) x 8% = $640,000 Stabilized/proforma cashflow = $140,000 Step 3 is Calculate the 3 Metrics (Cash on cash, Equity Multiple and Internal Rate of Return) To get Step 3 and to know how I decide which multifamily deal is a good deal or a bad deal, comment below. #apartmentinvesting #realestateinvesting #commercialrealestate

How to analyze a multifamily deal like a pro T.H.I.N.K. If you’re going to invest passively in a real estate, you need to THINK critically before wiring over your funds. Here’s how: T – Track Record: Look at the sponsor’s experience. Have they successfully executed deals in this asset class and market before? What challenges have they faced, and how did they handle them? H – Hard Numbers: Don’t just take pro forma projections at face value. Check: • Debt Service Coverage Ratio (DSCR): Is there enough cushion for loan payments? • Yield on Cost vs. Market Cap Rate: Is the deal creating value or just banking on appreciation? • Contingency Reserves: How much buffer is in place for unexpected costs? I – Investment Structure • How are profits split? • What fees does the sponsor take? • Is there a preferred return, and if so, how is it structured? N – Neighborhood & Market Trends • Is population growing? • Are jobs increasing? • What’s happening with supply and demand K – Known Risks & Exit Plan What could go wrong? High vacancy, interest rate risk, economic downturns—how is the deal structured to handle these? And how do you get your money back—sale, refinance, or long-term hold? - - Use the T.H.I.N.K. framework before you invest. Would you add anything else to this checklist?