Lesson 10: Multifamily Residential

December 12, 2023

Review:

• Exam 2
• Good news, bad news

Presentation:

• Types of multi-family
  • Duplex, Triplex, Fourplex
  • 5-units and more require “commercial” financing
• Advantages of multi-family
  • vs office, retail or other commercial
  • vs single-family
• Search for Multifamily
  • http://www.usamls.net/pueblo/
  • http://www.loopnet.com/
• Story of the Cree Terrace Apartments
  • Before:

• 
  
  • After: Current Street View
  • 8-unit apartment building
  • Low-end rentals
  • Dealing with evictions
  • Adventures in bats, cockroaches, pets, guests and carpeting
  • Importance of “Santos and Bob”
  • Headache to revenue factor
  • Financials
    • Purchase Price: $182k
    • Beginning Monthly Rent: $495/month + electricity
    • Ending Monthly Rent: $650/month, all utilities included
    • Monthly revenue = ~$5k, cashflow = ~$2.5k
    • Selling Price: $256k
  • Lessons:
    • 1 bedroom apartment better than 2+ bedroom
    • Rent drives value and utilities are a hassle (including utilities was a good move)
    • Go big (10+ units) or stick w single-family
    • Beware of the “nickel and dime” buyer while under contract
    • I sold way too soon
    • I should have hired professional property management

• 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:

• Select a market (e.g., Milwaukee)
• Use LoopNet or a local MLS to identify potential multifamily properties (10+ units)
• Calculate GRM for each property