Multi Unit Properties

[MarkTorgerson]

Since the banks look at cash flow for calculating value (or financing) for multi unit properties, does anyone out there use a rule of thumb for getting a quick idea of value? I am already familiar with the 1% rule but you can get property to cash flow with a weaker ratio.
For example if a multi unit building has $10,000 per month in rent, what should the selling price be? Would you use a ratio like 120x, so therefore the approx value would be $1,200,000...???
There is still of course the due diigence process but am looking for a quick way of separating the good from the bad regarding price vs revenue. I am curious if anyone has a rule of thumb they use..

Thanks
Mark

 

[housingrental]

The ratio will depend on your:
local market
renter profile
can value be added through renovations or modifications or additions or tear down
are the rents below market
age and condition of building
etc

My preference is at MINIMUM the POTENTIAL yearly rent should be 9% of purchase price assuming tenants pay utilities.
Other`s vary

 

[Dan_Eisenhauer]

Go on MLS or ICX and look through similar listings in your area.

Where the listing agent has posted income and expenses, divide the Net Operating Income by the asking price. That will give you a Cap Rate. If the Cap Rates you calculate are in the same range, that is probably the current Cap Rate for your area.

You can also ask a commercial mortgage broker familiar with your area.

Be aware that Cap Rates change from time to time and you may not be able to use today`s Cap Rate next year, or even next month.

 

[MarkTorgerson]

QUOTE (housingrental @ Oct 6 2008, 04:40 PM) The ratio will depend on your:
local market
renter profile
can value be added through renovations or modifications or additions or tear down
are the rents below market
age and condition of building
etc

My preference is at MINIMUM the POTENTIAL yearly rent should be 9% of purchase price assuming tenants pay utilities.
Other`s vary

Great info, thanks. I do understand there are many other factors and already own 2 12-suiters, so I know the due diligence process, Cap rates etc. What I am seeing in my area, are many quality buildings with rents below market. As the rent is the leading factor with bank financing, I want to use the low rents to justify a lower offer. I wanted to get a feel for a general rule of thumb and this helps.

Thanks

 

[Thomas Beyer]

QUOTE (MarkTorgerson @ Oct 6 2008, 04:18 PM) Since the banks look at cash flow for calculating value (or financing) for multi unit properties, does anyone out there use a rule of thumb for getting a quick idea of value? I am already familiar with the 1% rule but you can get property to cash flow with a weaker ratio.
For example if a multi unit building has $10,000 per month in rent, what should the selling price be? Would you use a ratio like 120x, so therefore the approx value would be $1,200,000...???
There is still of course the due diigence process but am looking for a quick way of separating the good from the bad regarding price vs revenue. I am curious if anyone has a rule of thumb they use..

Thanks
Mark
price per door rules of thumb:

80 to 120 times monthly rent, or

35,000 to 150,000 per unit, or

4% to 15% CAP rate !

like a car: what does an average car cost these days ? between $20,000 and $150,000 .. depending on condition !

in a building:
small city (vs. big city): higher CAP rates = lower multiples = lower price per door
poor area of town(vs. nice area): higher CAP rates = lower multiples = lower price per door
poor condition (vs. prestigious condition): higher CAP rates = lower multiples = lower price per door
small units(vs. big ones): higher CAP rates = lower multiples = lower price per door
high interest rate environment(vs. low rates): higher CAP rates = lower multiples = lower price per door

 

[MarkTorgerson]

QUOTE (thomasbeyer2000 @ Oct 7 2008, 08:11 AM) price per door rules of thumb:

80 to 120 times monthly rent, or

35,000 to 150,000 per unit, or

4% to 15% CAP rate !

like a car: what does an average car cost these days ? between $20,000 and $150,000 .. depending on condition !

in a building:
small city (vs. big city): higher CAP rates = lower multiples = lower price per door
poor area of town(vs. nice area): higher CAP rates = lower multiples = lower price per door
poor condition (vs. prestigious condition): higher CAP rates = lower multiples = lower price per door
small units(vs. big ones): higher CAP rates = lower multiples = lower price per door
high interest rate environment(vs. low rates): higher CAP rates = lower multiples = lower price per door

Looking at strictly from a quick cash flow or bank financing perspective. Or....do the current rents warrant the current asking price??? I have been working the numbers and the 9% comment seems to work well.

 

[housingrental]

Thanks Mark.
I`ve found around that number is often the bep for cash flow.

 

[Thomas Beyer]

QUOTE (MarkTorgerson @ Oct 7 2008, 08:50 AM) Looking at strictly from a quick cash flow or bank financing perspective. Or....do the current rents warrant the current asking price??? I have been working the numbers and the 9% comment seems to work well.
market is changing as we speak .. with financing harder to come by I expect prices to come down somewhat to a sensible level .. but not below a floor price as often the investment alternatives are not there ! stock market ? gold ? industrial REITs ? dividend stocks ? under your mattress ? T-bills ?

 

[Nir]

Great post, great information!

Thank you Thomas, Adam, Mark and Dan.

Basically I calculate the CAP in 3 ways:

- Based on the listing agent`s posted income and expenses
- Based on actual utility bills, rents provided and some pretty accurate estimates like insurance, vacancy etc.
- Based on an expense to rent ratio rule of thumb (i.e. 55%)

If the last 2 are similar confidence level is high, the first method is like using an ad (advertisement). so I don`t really care what number is advertised. in the majority of the cases it`s like 25% higher than actual expected net income. in other words a complete lie. why? because they always forget to consider insurance, vacancy rate, maintenance and repair property management etc. (OK not always just 95% of the cases ).

Regards,
Neil

 

[MarkTorgerson]

QUOTE (investmart @ Oct 9 2008, 12:25 AM) Great post, great information!

Thank you Thomas, Adam, Mark and Dan.

Basically I calculate the CAP in 3 ways:

- Based on the listing agent`s posted income and expenses
- Based on actual utility bills, rents provided and some pretty accurate estimates like insurance, vacancy etc.
- Based on an expense to rent ratio rule of thumb (i.e. 55%)

If the last 2 are similar confidence level is high, the first method is like using an ad (advertisement). so I don`t really care what number is advertised. in the majority of the cases it`s like 25% higher than actual expected net income. in other words a complete lie. why? because they always forget to consider insurance, vacancy rate, maintenance and repair property management etc. (OK not always just 95% of the cases ).

Regards,
Neil

Thanks everyone, great info!
I am now looking at properties the following way (works for the area I am looking anyways):
The 9% rule stated above (plus or minus) to quickly separate the potentials from the dogs.
I have recently been fortunate to come across the CMHC commercial template. I then plug the numbers into here to see if my intended offer and financing method will have the net income cover 130% of the debt service. Works very well.