Lesson 18: Multifamily Valuation Metrics

October 28, 2021

Review:

• Multifamily Residential

Presentation:

• Valuation Metrics for multifamily residential
  • Price per unit
  • Gross rent multiplier (GRM)
  • Net Operating Income (NOI)
  • Capitalization rate (aka “Cap Rate”)

• Calculate Price per unit
  • Divide asking price by the total number of units
  • For example, if the asking price is $4,000,000 for a 50-unit apartment building
  • The price per unit is $4,000,000/50 = $80,000 per unit

• Calculate the gross rent multiplier
  • First, calculate the gross annual rent
    • Rent per unit = $750 per month
    • Annual rent per unit = $750 x 12 = $9,000
    • Gross annual rent = Annual rent per unit x number of units = $9,000 x 50 = $450,000
  • Next, divide the asking price by the gross annual rent
    • Asking price = $4,000,000
    • Gross annual rent = $450,000
    • Gross rent multiplier = $4,000,000/$450,000 = ~8.9

• Calculate Net Operating Income (NOI)
  • NOI = Gross annual rent – Vacancy Rate – Operating Expenses
  • Gross annual rent = $450,000
  • Vacancy Rate = 3%
  • Operating Expenses
    • Property tax = 38,000
    • Hazard insurance = 19,000
    • Utilities = 28,000
    • Repairs = 35,000
    • Maintenance = 17,000
    • Advertising = 3,000
    • Estimated Total = $140,000
  • NOI = $450,000 – (3% * $450,000) – $140,000 = $450,000 – $13,500 – $140,000 = $296,500

• Calculate Cap Rate
  • Cap Rate = NOI/Asking Price
  • Cap Rate = $296,500/$4,000,000 = 0.074 = 7.4%
  • Alternatives
    • You don’t need to use Asking Price. You might instead use an offer price, like $3.6M.
      • Cap Rate = $296,500/$3,600,000 = 0.082 = 8.2%
    • You can also use the formula to determine an offer price, x, for a specific Cap Rate.
      • 9.5% = $296,500/x
      • x = $296,500/9.5% = $3,121,052.63 = ~$3.1M.

Assignment:

• Calculate the metrics for your selected property
  • Price per unit
  • Gross Rent Multiplier (GRM)
  • Net Operating Income (NOI)
  • Cap Rate