Analyzing Deals: How To Determine The Value Of A Property

One of The most important features of multifamily real estate is how to determine the value of a property.

As with any investment you have to understand what you’re buying before you go ahead and pull the trigger.

The stock market is filled with individuals who know the price of everything, but the value of nothing.” – Phillip Fisher.

And what’s the point in investing in something if you don’t know the true value of what you’re buying?

There has to be something in it for you and when purchasing a property, either the single family or multifamily, you’ll need to know what you’re investing in and the value of each property before you buy. 

But how do you work out the value of a property?

The Multifamily Mindset

Multifamily property’s value is based on the cash flow coming into the property.

This makes the investment a safe bet because it means, even if someone was to sell their house for less than the price of value, it won’t affect the investors as, in multifamily real estate, the property’s value is based on its cash flow. If we keep the cashflow up, the property’s value will stay up, making this a smarter and safer way to invest. 

Cash is king and is the key to knowing the true value of the property in the multifamily real estate. 

To get the true value of a property we have to figure out what the net operating income (NOI) of each property is. 

What Is The Net Operating Income And How Do We Work It Out?

NOI measures the potential of a plot of real estate to create cash flow from its operations, rental income, or assets. 

It does this by subtracting the yearly expenses of running the property, from the yearly income of the property to give you an overall profit, or the NOI.  

When valuing a potential investment, you’ll want to first obtain an offering memorandum from your seller, which will give you details of the profit and losses the estate makes. For example, it should give you a breakdown of all the income, expenses, rent roll, profit, and loss of the property. 

Make sure you also take a good look at what the properties income is and the longevity of that income. For example, rental income will never stagnate, so long as you always have people moving into the property, you’ll have cash in your pockets. 

Once you have that information, calculate your NOI by subtracting the property’s expenses from its earnings. Say a small apartment building made $75,000 in rent last year, but maintenance costs set its owners back by $30,000. That will give you an NOI of $45,000.

Now that we know the NOI of the property, we can calculate its approximate value by multiplying the NOI by 10. This approximate value or ‘strike price’ will enable you to evaluate which properties have the best potential for growth and the best rates of return. 

Say we multiply our NOI of $45,000 by 10, we’ll get an approximate value of $450,000. If a seller asks for more than $450,000, you’ll then know that they’re valuation is most likely overpriced, but if they ask for less than the strike price, then you know that you’ll be on for a good value for money deal. For example, if they offered you $380,000, you’ll know you’re in the money, making a $70,000 profit on the price of the property.

When Do We Know When To Invest?

It’s at that point you know you’ve made a saving on the price of the property that you should invest. Do your research on the property and calculate the NOI and strike price of the property. 

After you’ve calculated these figures you’ll then have a good idea of how much the property is truly worth and perhaps then use this knowledge to leverage a good price for yourself on the real estate you’re interested in purchasing. 

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