How to Analyze Multifamily Investment Opportunities in 2024
As an investor looking to protect your wealth, multifamily properties offer great investment opportunities. With the right approach, multifamily investments can provide stable cash flow and upside potential even in volatile markets.
However, every investor must know how to analyze real estate deals before making a financial commitment. This way, you won’t be betting too much on a lower-value multifamily asset.
In this guide, we’ll show you how to analyze multifamily investment opportunities so that you can get the best returns on your capital. We’ll also explain how Wellings Capital can help you invest in alternative properties that perform well in recessions while offering tax advantages.
How to Analyze a Multifamily Property: 4 Key Factors to Consider
Consider the following to evaluate the value of a multifamily property:
Location
Income potential
Unit mix
Expenses
1. Location
One of the most important factors when evaluating any real estate investment is location. For multifamily properties, look for areas with low crime rates, good schools, and amenities like public transit, entertainment, healthcare, and dining options. Desirable locations with these attributes tend to have higher demand for rentals and stable property values.
2. Income Potential
Review the property’s rent roll to determine current rental income and vacancy rates. Then, compare current rents to market rates to assess income growth potential. Properties with below-market rents and stable or growing demand indicate an opportunity to increase net operating income over time through gradual rent increases.
3. Unit Mix
Consider the property’s unit mix — the number of units, square footage, and layout of each unit type. A diverse mix of studio, one-bedroom, two-bedroom, and three-bedroom units appeals to renters at different life stages and income levels. This typically means higher occupancy and more stable cash flow.
4. Expenses
Evaluate the property’s operating expenses, including utilities, insurance, maintenance, management fees, and capital expenditures. Look for properties with stable, predictable expenses relative to comparable properties. High expenses significantly impact cash flow and investment returns.
With proper considerations, you can determine a multifamily property’s potential, which can then help you assess its value. Speaking of value, what does the process of evaluating a multifamily investment property look like? We’ll break it down into simple steps below!
How to Evaluate Multifamily Properties in 4 Steps
The value of a property will determine how much you’re willing to invest in it. Hence, multifamily property valuation is essential before committing your capital.
Here is how to value multifamily property:
Analyze the net operating income.
Determine the capitalization rate.
Estimate the property value.
Consider additional metrics.
1. Analyze the net operating income.
The net operating income (NOI) refers to the income generated by a property after deducting operating expenses. To calculate the NOI, subtract the property’s operating expenses, such as utilities, maintenance, mortgage payment, insurance, and property taxes, from its operating income. The higher the NOI, the more valuable the property.
2. Determine the capitalization rate.
The capitalization rate, or cap rate, is used to estimate the value of income-generating property. To calculate this metric, divide the NOI by the property’s current market value. For example, if a property generates $50,000 in NOI and has a market value of $500,000, its cap rate is 10% ($50,000 / $500,000). Cap rates vary between property types and markets, with multifamily properties typically having cap rates ranging from 4% to 12%.
3. Estimate the property value.
To determine a multifamily property’s value, divide its NOI by the cap rate. For example, if the NOI is $200,000 and the cap rate is 8%, the estimated value is $2.5 million ($200,000 / 0.08). The lower the cap rate, the higher the property value. Factors like interest rates, risk, and property demand influence cap rates.
4. Consider additional metrics.
Other factors professional appraisers look into are outlined below. You should be aware of these considerations when learning how to calculate the value of multi-family property.
Comparable Property Sales: Analyzing recent sales of comparable properties in the area. Properties with similar characteristics, like number of units, amenities, and location, are good comparables.
Replacement Cost: Estimating the total cost to construct a similar building today. The value of the existing property is usually lower than the replacement cost due to depreciation.
Cash Flow: Evaluating the property’s ability to generate cash flow and profits for investors after all expenses. Strong, stable cash flow indicates a safe, income-producing investment.
Location: Assessing the property’s neighborhood, access to transportation and amenities, job opportunities, and growth potential. Desirable, high-demand locations positively impact value.
Physical Condition: Inspecting the property’s structural and mechanical integrity, available amenities, and necessary repairs or renovations. Well-maintained properties in good condition are typically worth more.
By analyzing multi-family properties using the metrics above, investors can determine if an investment has the potential to generate solid returns at a reasonable asking price. Remember, conducting thorough due diligence is key to finding the right investment opportunity. One key means of ensuring proper evaluation and informed investment decisions is by predicting expected revenue and expenses.
Forecasting Revenue and Expenses for a Multifamily Property
To properly analyze a multifamily investment opportunity, you must do projections for both the revenue and expenses.
Here is how to analyze multifamily properties’ revenue and expenses:
Revenue
Evaluate the property’s current rents to determine if they’re below, at, or above market rates. If below market, you have the potential to increase rents, thereby boosting net operating income.
Gather data on comparable properties in the area to determine market rents for each unit type. Factor in the property’s occupancy rate, location, amenities, and condition to determine optimal rent levels. Forecast revenue growth over the holding period based on rent increases and consistent high occupancy.
Expenses
Next, review the property’s historical and current operating expenses to understand major costs like utilities, maintenance, insurance, and taxes. Compare to industry expense benchmarks to evaluate if costs seem reasonable or if there are opportunities to reduce expenses.
Budgeting at the corporate level and allocating costs based on unit count or square footage helps forecast operating expenses. Factor in annual expense escalations for items like utilities and insurance over the holding period. This way, you’ll have a unit breakdown of each type of expense and what you can optimize to reduce them.
A comprehensive multifamily deal analysis should include the following expenses:
Utilities (electric, gas, water, sewer, trash)
Repairs and maintenance
Property management fees
Insurance (property, liability, umbrella policy)
Property taxes
Reserve contributions for capital expenditures
Understanding the revenue potential and having a detailed expense forecast allows you to determine the property’s net operating income over your intended holding period. From there, you can calculate metrics like capitalization rate and cash-on-cash return to evaluate the strength of the investment opportunity. Conducting thorough due diligence upfront on the property’s revenue and expenses helps ensure realistic projections and minimizes surprises after acquisition.
In addition to estimating your property’s worth and forecasted revenue/expense, you’ll also want to prepare yourself for negotiation. What steps do you need to take to make a competitive offer for a multifamily property deal?
Structuring a Competitive Offer for a Multifamily Deal
Striking a good property deal can contribute immensely to your final return on investment.
Property sellers usually have multiple interested buyers, so consider the following tips to ensure getting the deal without overpaying:
Impress the seller with your track record.
Pay attention to the price and terms.
Move quickly.
1. Impress the seller with your track record.
In a competitive market, the strength of your offer depends heavily on your track record and credibility as a buyer.
Highlight your experience acquiring and managing similar properties. Provide references from past sellers and partners. Discuss your access to financing and your company’s ability to close quickly.
The more confidence the seller has in your ability to execute, the more likely they are to accept your offer.
2. Pay attention to the price and terms.
The ultimate determining factors in any offer are the price and terms.
For the price, make sure your offer makes financial sense based on your multifamily investment analysis. However, be prepared to pay a premium for a high-quality property in a desirable location. For terms, consider offering concessions like flexible closing dates, higher deposits, or as-is conditions.
Be prepared for some negotiation, though. The seller will likely want the best overall deal across price, terms, and buyer qualifications.
3. Move quickly.
In competitive markets, the speed of your offer can be just as important as the price. Well-priced, high-quality listings often receive multiple offers within days of being announced on the market.
Be ready to tour the property and make an offer quickly before another buyer swoops in. Let the listing agent know you are serious and able to close fast. As a savvy investor, having access to financing and the ability to analyze and underwrite deals rapidly will allow you to beat out slower competitors.
Making a strong yet strategic offer for a multifamily property requires balancing many factors. Conduct thorough due diligence, highlight your track record, offer a fair price and favorable terms, and be ready to move swiftly. Following these steps will position you to win the deal and gain an attractive new addition to your investment portfolio.
But what if we told you you could save yourself the hassle of property valuation and negotiation? You can get the same benefits by investing with professionals like Wellings Capital, who specializes in recession-proofed and tax-advantaged commercial properties. Learn more about these alternatives below!
Recession-Proofed Alternatives to Multifamily Properties
To get the best out of your investment journey, consider diversifying your portfolio by investing in a real estate private equity firm. Wellings Capital has years of commercial property investment experience and can help you grow your wealth while enjoying tax benefits and securing your capital against recession.
The following commercial properties are great alternatives to a multifamily investment:
Self-storage facilities
RV parks
Medical office buildings
Single-tenant net lease
1. Self-Storage Facilities
Self-storage facilities are attractive commercial real estate investments, especially during economic downturns. Demand for self-storage tends to increase during recessions as people downsize homes and need a place to store excess belongings. These properties also require minimal management. Wellings Capital has found self-storage facilities to generate stable cash flow over long periods, and you can contact us now to cash into the trend.
2. RV Parks
Recreational vehicle parks are another recession-resistant investment for those seeking opportunities that don’t involve analyzing multi-family properties.
RVing has become increasingly popular in recent years as more people opt for budget-friendly staycations and road trips. Even when the economy struggles, RV parks tend to remain in high demand. These properties also require little daily management, and many long-term tenants pay rent on an annual basis, providing predictable income.
3. Medical Office Buildings
Healthcare is another industry that remains stable during economic downturns. Medical office buildings, or MOBs, house doctors’ offices, clinics, and other healthcare services. Tenants in MOBs typically sign long-term leases of 7–10 years, providing steady rent payments. With the aging population, demand for healthcare services will only increase over time.
4. Single-Tenant Net Lease
Single-tenant net lease properties with long-term leases, often 10–25 years, provide durable income streams even during market volatility. Tenants are typically large corporations with an established history of making rent payments. These properties require almost no management, as tenants are responsible for maintenance, taxes, and insurance in addition to rent under a net lease. Popular single-tenant assets include fast-food restaurants, convenience stores, and pharmacies.
While multifamily real estate can be an attractive investment, they’re closely tied to the overall economy and job market. Multifamily deal analysis reveals that in recession periods, multifamily demand and rents tend to drop as unemployment rises and household incomes decrease. For real estate investors wanting stable income and protection from economic cycles, alternative commercial real estate like self-storage, RV parks, medical office buildings, and single-tenant net leases may be preferable, especially leading into 2024.
Wellings Capital specializes in acquiring and managing these types of recession-resistant assets. Reach out to our team to learn more.
Frequently Asked Questions
How to evaluate a multifamily investment?
Evaluating a multifamily investment involves a thorough analysis of key financial metrics. Start with the purchase price, scrutinize the financial data, and understand the net operating income. Examine cash flow closely and assess the potential return on investment (ROI) next. Finally, determine the net ROI to gauge the investment’s profitability.
What is a good ROI for multifamily?
A good ROI for multifamily properties typically ranges from 14% to 18%, though this can vary based on the local real estate market conditions and the asset class. Investments in growth markets may start with a lower ROI, with the expectation of appreciation over time.
What is a multifamily cost analysis?
A multifamily cost analysis is a valuation process that employs three different methods: the income approach, which focuses on revenue potential; the replacement cost approach, estimating the cost to rebuild; and the comparable sales approach, which looks at similar property sales to determine value.
Conclusion
Multifamily investment opportunities require a balanced, cautious approach. Do your due diligence by learning how to analyze multifamily investment opportunities the right way and run the numbers with conservative assumptions.
While higher cap rates may emerge, focus on markets with strong populations and job growth tailored to your investment goals and risk tolerance. With the right property at the right price, multifamily still offers stable cash flow and inflation-hedging upside potential.
In your investment journey, it’s equally important to diversify your portfolio, and commercial property investments are an excellent option. These types of properties have historically performed well during recessions and also provide robust tax advantages to maximize your profits. For more info on how you can get started, contact our team!