## Module 3: Multifamily Valuation

January 30, 2023

Review:

- Comparable Sales Analysis

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

- First, calculate the gross annual rent
- 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.

- You don’t need to use Asking Price. You might instead use an offer price, like $3.6M.

Assignment:

- Find a 4-plex for sale and record the address.
- Find a 20+ unit apartment building and record the address.
- Calculate the metrics for both of your selected properties
- Price per unit
- Gross Rent Multiplier (GRM)
- Net Operating Income (NOI)
- Cap Rate