How to Analyze Multifamily Deals

Hillview Flats, an example of a development one might encounter when analyzing multifamily property deals

Gaining a clear understanding of a potential property is essential in making investment decisions that lead to profitability and sustained success. Conducting a multi-family real estate investment analysis is nothing short of essential. But how do you do it?

8 Steps for Analyzing Multifamily Property Deals

We will cover the basics of conducting a multifamily real estate investment analysis to give you an idea of how it works. Get ready to crunch some numbers!

  1. Examine the Purchase Price. You will need to assess the value of the property against the asking price. Look at “comparables” – or value vs. price of other multifamily properties in the same area. This will give you an idea of whether or not you will be getting a good deal. 
  1. Gather Relevant Financial Data. From the seller, you should receive a pro forma that covers anticipated income and expenses. Obviously, this is not the only source you need to tap. Sellers of multifamily investment properties may be… overly enthusiastic or positive when it comes to occupancy rates and income! Ask for historical data (e.g. profit and loss statements, the rent roll) and examine them for the nuances.
  1. Consider the Purchase Price and Cash Requirement. Using comps and other data, take a look at the purchase price, as well as other expenses (e.g., rehabbing the property). Factor in the cost of capital improvements, inspections, and closing costs. Two simple formulas to keep in mind:
    Property Price + Rehab Costs + Closing Costs = Cost
    Down Payment + Rehab Costs + Closing Costs = Cash Requirement

  1. Evaluate Expenses. Calculate ongoing expenses, such as property management, taxes, insurance, repairs, maintenance, marketing, utilities, and landscaping.
  1. Look at Anticipated Income. How much income is a property likely to generate each month? Rent is a major factor, of course, but don’t forget about parking, laundry, vending machine sales, and other potential revenues.
  1. Calculate the Net Operating Income. This is Income – Operating Costs = Net Operating Income. This calculation helps you compare different investment opportunities.
  1. Estimate Cash Flow. More equations! Take your net operating income and subtract the mortgage payment. (Net Operating Income – Mortgage Payment = Cash Flow). Check if your lender will include taxes and mortgage insurance in your payment as well.
  1. Determine Your ROI. At this point, you want to see a positive cash flow. The next step is to determine your potential return on investment (ROI):
    Cash Flow ÷ Investment Cost (down payment + closing costs + rehab costs)

If it looks good, double check. If it still looks good, you can feel more confident about moving ahead. In truth, fully analyzing multifamily property deals is much more complex than the steps we’ve outlined here. Contact Belmont Associates to get more details.