Finding the value of multifamily investment properties is different than looking at the value of other types of real estate, simply for the fact that you will likely be renting to several tenants, and will have the upkeep of multiple units.
When looking at the value of any property it is important to remember that there is a difference between the price that is paid for a property and its actual value. To value a multi-family property there are several factors to consider like location, potential income, expenses, and more.
The cost of the property is not the only thing to consider. It is also important to look at the local market and look at any trends and expectations for the future. You cannot value a multi-family unit in a thriving metropolitan area, for instance, the same way you would a property in a small city that is struggling economically.
You will need to look at comparable multi-family properties, average rents being charged for similar units, and vacancy rates for the area. All of these factors impact the value of a multi-family property.
When you own a multi-family property, you will likely be collecting rent from one or more tenants. This might sound like a great thing, considering it will be income in your pocket. However, you also need to keep in mind the operating expenses involved.
First, you should look at the rent you expect to bring in. Make sure to keep in mind any vacancies that might arise. Next, consider if there are any immediate costs like catching up on delayed upkeep or upgrading units. In addition to this, you need to look at expenses you expect to have while owning the property. This can include:
- Regular maintenance
- Paying a property manager, if needed
- Unexpected repairs
It is always best to estimate expenses on the higher end, so that unexpected costs are accounted for and will not impact your expected monthly income.
Capital expenditures are also a factor. This is an improvement you make that will extend the life of the property, for instance a new water heater. A certain amount should be calculated to be set aside for these expenses.
Taking the expenses and subtracting them from the income you expect to bring in monthly will give you the Net Operating Income (NOI) for the investment property.
Multi-family properties are broken down by class type for investment purposes, which can help you determine potential income. The class is based on the overall quality and condition of the property. If you are unsure, a local real estate professional should be able to help you find the class for a specific property.
- Class A. These properties can demand the highest rents and are considered luxury buildings in high-demand areas.. The properties are usually newer or renovated and offer top-class amenities.
- Class B. Properties with fewer amenities that are located in desirable areas are considered Class B asset properties. They are usually well-kept and might be more recently renovated. The rents are not as high as a Class A property.
- Class C. A Class C property is located in a less desirable area and will be older buildings that are probably in need of major improvements. These properties bring in the lowest rent amounts.
There are so many different factors that go into calculating the value of a multi-family property, it is best to work with a local real estate broker or advisor to ensure you consider all important factors.