Our Secret Cheat Sheet to Multi-Family Metrics

By
Real Estate Broker/Owner with Providence Group Realty TREC# 0608931
https://activerain.com/droplet/4L2v

Providence Group Realty serves a large and growing investor niche within the DFW Metroplex and surrounding communities. Although most of our investors are interested in accumulating single-family properties, we are starting to see growth on the multi-family side as the Telecom Corridor® continues to expand.

Whether cultivating a relationship with a newer investor -- or training an agent to start pursuing service delivery in this area, we find that the vocabulary used in buying mutli-family properties has a tendency to be unique, and at time differs from both single-family and commercial real estate.

Here is our hotlist of key performance metrics for multi-family property investment buyers:

Gross Income

The sum of all rents.  This figure should represent actual AR. Do not include potential rents for  units that are unoccupied, compensated, removed  from service, or accounts in collection.

 

Gross Expenses

The sum of all operating costs other than debt service & capital expenditures (improvements).

 

Debt Service

Mortgage

 

CADS

Cash after debt service (NOI minus Mortgage)

 

Net Operating Income (NOI)

Gross Income Less Gross Expenses

 

If the seller doesn't share the actual numbers with you - you can work around that. Simply divide the gross income by 2. This will give you a rough estimate of the Net Operating Income (NOI). Most of the time, operating expenses for a company are anywhere from 40 to 60 percent of the gross income, so we just choose the median percentage level of 50%.

 

Cap Rate

(aka, ROI)

The Capitalization Rate or “Cap Rate” is the percent annual return given a specific investment or property value.  It is the net operating income of the property divided by its value.  Technically, it is the weighted averaged cost of capital, both debt and equity, invested in an income producing asset.

 

Simple formula: Divide the NOI by the asking price. This will give you the approximate cap rate. 

 

Once you determine the cap rate, see if it is generally between 8% and 12%. 10% is the usual rule of thumb. If the cap rate is lower than 8%, it is generally not worth it. If higher than 12%, there is probably something high-risk about the property (dangerous area, desperately needing repairs, etc...) 

 

Insurance

Insurance costs should be included in Gross Expenses; however, it is important to disclose this line item independently to  satisfy NTREIS requirements

 

Gross Multiplier

The Gross Rental Multiplier (GRM) is  a first quick value assessment tool to see if further more detailed analysis is warranted.  If the GRM is way out high or low compared to recent comparable sold properties, it probably indicates a problem with the property or gross over-pricing.

 

It is important to beware of the limitations of the gross rent multiplier. For some properties, gross rents may include funds that a landlord must spend on utilities, while the tenants of other buildings may pay for utilities themselves. Various property-specific items are not captured when using the GRM. If one property has higher taxes or higher vacancy than the next, then using the GRM to calculate values will be deceiving.

 

Gross Rent Multiplier or "GRM" is the ratio of the price of a real estate investment to its annual rental income before expenses:  Gross Rent Multiplier (GRM) = Sale Price / Potential Gross Income

 

GRM Valuation Strategy:

 

Get the GRM for recent sold properties:

Market Value / Annual Gross Income = Gross Rent Multiplier (GRM)

Property sold for $750,000 / $110,000 Annual Income = GRM of 6.82

 

Estimating value of property based on GRM:

Let's say that you did an analysis of recent comparable sold properties and found that, like the one above, their GRM's averaged around 6.75. Now you want to approximate the value of the property being considered for purchase. You know that its gross rental income is $68,000 annually.

GRM X Annual Income = Market Value

6.75 X $68,000 = $459,000

 

If it's listed for sale at $695,000, you might not want to waste more time in looking at it for purchase.

 

Occupancy Rate

This is the percentage of all rental units occupied or rented at a given time.

 

If a complex has 100 units, and 20 of those units are vacant, the occupancy rate is 80%.

 

For an investor, this figure shows potential revenue that can be achieved through improved management or by capital improvements to place vacant units in service.

 

Property Class

Generally speaking, there are four classes of multi-family properties: (A, B, C or D) 

 

Class A: These properties were typically built within the past 10 years or so; have good quality renters with good jobs; there are very little maintenance and repair issues. The general cap rate will range between 5 and 7%. 

 

Class B: These properties were built within the last 20 years or so; the tenants are a mix of blue and white collar workers and some deferred maintenance / repairs. The general cap rate will range between 7 and 9%. 

 

Class C: These properties were built within the last 30 years or so; tenants are a mix of mainly blue collar workers and subsidized housing and has maintenance and repairs. Tenants may be renters for life. The general cap rate will range between 10 and 12%. 

 

Class D: These properties were built 30 years ago, plus; they are usually found in 'bad' areas, and filled with bad tenants. If "D's" are in a "C" or "B" area, you may reposition to a higher cap rate. The general cap rate range will be 12% or more. 

 

The above-listed classifications are for general rules of thumb only. You may have a 40 year old apartment complex that has been repositioned, or fixed up, and is in Class B condition. However, for valuation purposes, the above information will assist you in proper value determination. 

 

Can you suggest a metric / definition we should add to our list?  Or have you seen terms used in other ways that we may want to include alternate meanings for? If you have feedback, we would love to hear from you. :-)

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Show All Comments
Rainmaker
5,978,554
Roy Kelley
Realty Group Referrals - Gaithersburg, MD

This is a good cheat sheet for new real estate investors and their agents. 

Have a most productive summer!

Jul 13, 2014 09:17 PM #1
Rainer
25,000
Jimmy Van Smith
Frisco, TX
Residential Mortgage Loan Originator

Thanks for start on list!

Jul 13, 2014 11:18 PM #2
Rainmaker
1,058,819
Kevin J. May
Florida Supreme Realty - Hobe Sound, FL
Serving the Treasure & Paradise Coasts of Florida

OMG Amanda, now the cat's outta the bag!  We'll need to let this digest a bit before putting more puzzle pieces on the table.

Jul 16, 2014 12:03 AM #3
Rainmaker
1,183,745
Adrian Willanger
206 909-7536 AdrianWillanger-broker.com - Seattle, WA
Profit from my two decades of experience

Amanda, excellent cheat-sheet, very helpful. Thanks.

Nov 19, 2014 10:50 PM #4
Rainer
53,778
Terry Kraemer
Exceed Realty - Houston, TX
Houston Realtor

Thanks Amanda, I am working with a commercial investor at the moment and this has come in very handy!!!

Jan 09, 2016 03:47 AM #5
Rainmaker
72,718
Bryan Spann
SYSNE LLC - Houston, TX
Agent

Thanks Amanda, Great information. 

Jan 20, 2016 10:40 PM #6
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Rainmaker
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Amanda Thomas

​Broker, SRES®, BPOR, MCNE, ​Certified DRS Agent™
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