How to Analyze Multifamily Investment Opportunities in 2024

As an investor looking to protect and grow their wealth, multifamily can be a solid investment. With the right approach, multifamily investments may provide stable cash flow and upside potential even in volatile markets.

However, to be successful, every investor must know how to analyze multifamily real estate deals before making a financial commitment to this asset type. Careful evaluation can protect the investor from committing to an under-performing multifamily asset.

In this guide, we’ll provide some guidance to you for how to analyze multifamily investment opportunities so that you can be positioned to obtain better returns on your capital. We’ll also explain how Wellings Capital can help you invest in asset types that have historically performed well in recessions while offering tax advantages.

Although we will provide a number of factors for you to consider to position your portfolio for success, we cannot ensure that risks will not be present. You will need to evaluate the unique risks presented by this asset class as discussed below.

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
NOI potential

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 transportation, entertainment, healthcare, and dining options. Desirable locations with these attributes tend to have higher demand for rentals and more stable property values. Riskier locations will present increased concerns.

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 may indicate an opportunity to increase net operating income over time through gradual rent increases. However, there is always a risk that an economic downturn will have a negative effect on tenant stability and the consistency of rent rolls.

3. Unit Mix

Consider the property’s unit mix — the number of units, square footage, and layout of each unit type. You must determine if the unit mix is a fit with the target renter demographic for the subject property. This could lead to higher occupancy and more stable cash flow, but the property may not be well-suited to its particular location.

4. Expenses

When analyzing a multifamily property, evaluating its net operating income (NOI) is crucial. NOI is calculated by subtracting operating expenses from gross rental income. This figure gives you a clear picture of the property's profitability before financing costs and taxes. A higher NOI indicates better cash flow and investment potential. Assessing the NOI helps you make informed decisions about the property's financial viability.

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 3 Steps

The value of a property will determine how much you’re willing to pay for it. Hence, multifamily property valuation is essential to assess before committing your capital.

Here is how to value multifamily property:

Analyze the net operating income
Determine the capitalization rate
Estimate the property value

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, start with gross revenue and subtract the property’s operating expenses such as payroll, utilities, maintenance, insurance, and property taxes. 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. But in reality, it’s a measurement of market sentiment. In some ways, it’s similar to the multiple a buyer will pay for a property. For example, a 5% cap rate is a 20x multiple (1/0.05).

This subjective figure measures the market’s view of the value of the income stream for a property like this in a location like this at a time like this.

The cap rate is deeply influenced by interest rates, investor demand, demographic trends, and much more. This value varies between property types and markets, with multifamily properties typically having cap rates ranging from 4% to 8%.

3. Estimate the property value

To estimate a multifamily property’s value, divide its NOI by the market cap rate. For example, if the NOI is $200,000 and the market 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.

By analyzing multifamily 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 to ensuring proper evaluation and informed investment decisions is properly projecting 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 are some key areas to analyze when you consider a multifamily property’s 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. If above market, this could be a red flag for problems raising income later.

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, but develop a worst-case scenario to identify what a break-even investment looks like.

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. Keep in mind that expenses like insurance utilities and taxes tend to increase - sometimes dramatically.

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

Quick Tip:

Be careful when evaluating these expenses. Assume property taxes could go up to reflect the new sale. Assume utilities and insurance will rise unless you have tangible reasons they won’t.

For example, our firm once acquired a 125-unit multifamily asset where the previous owner paid for water, sewer, trash, and waste collection. We knew we could pass these expenses back to tenants in that market, so we projected a utility cost decrease — along with increased property tax expense due to new purchase price

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 that the seller will accept?

Structuring a Competitive Offer for a Multifamily Deal

Striking a good property deal can make or break your final return on investment. Property sellers usually have multiple interested buyers, so you often have to sell the broker and the seller on why they should even speak with you. Unlike the residential realm, brokers don’t have to present offers they don’t see as credible.

Consider the following tips to ensure getting the deal without overpaying:

Impress the broker and seller with your track record
Pay attention to the price and terms
Move quickly

1. Impress the broker and 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 cash and financing, plus 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. Brokers will frequently recommend sellers accept a lower price to get better terms and more certainty of closing.

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 may allow you to beat out slower competitors.

Of course, you’ll want to make your offer contingent on a thorough property inspection, which should look at every cubic foot of the property, including attics and basements. Our firm was once under contract to acquire an $8 million multifamily asset in Tennessee. The inspection revealed black mold in the virtually never-used basements. We walked away to protect our investors and ourselves.

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, which specializes in recession-resistant and tax-advantaged commercial properties. Learn more about these alternatives below!

Alternatives to Multifamily

To get the best out of your investment journey, consider diversifying your portfolio by investing in a real estate private equity fund.

Wellings Capital has deep 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 can be appealing portfolio expansions if you invest in multifamily real estate:

Self-storage facilities
RV parks
Mobile home parks
Open-air shopping centers
Industrial
Medical office buildings

For more information on some of these asset types, we wrote a blog post here going into detail on them.

Multifamily real estate can be an attractive investment; however, it often trends with 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, mobile home parks, open-air shopping centers, industrial parks, and medical office buildings are viable alternatives. Diversification is particularly crucial given the current uncertainty in the economy and real estate markets.

Reach out to our team to learn more about Wellings Capital’s funds that invest in self-storage, RV parks, mobile home parks, and open-air shopping centers, industrial parks.

Frequently Asked Questions

Evaluating a multifamily investment involves a thorough analysis of the market, the property, and key financial metrics. Start with the purchase price, scrutinize the financial data, and understand the net operating income. Next, examine cash flow closely and assess the potential return on investment (ROI). Finally, determine the net ROI to gauge the investment’s viability.
This is the wrong question. You should be looking for the best risk-adjusted ROI for multifamily or any investment in your portfolio.
Many multifamily real estate investors look for an average annual return of about 14% to 18%, though this can vary based on interest rates, local market market conditions, and the vintage/condition of the property. Investments in development or value-add deals may start with a lower return, with the expectation of growth and appreciation over time.
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. The vast majority of these valuations are based on the income approach, which utilizes the net operating income (NOI) and the cap rate to determine a property’s 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 may offer stable cash flow and inflation-hedging upside potential.

In your investment journey, it’s equally important to diversify your portfolio, and commercial real estate may be an excellent option. These types of properties have historically performed well during recessions and also provide robust tax advantages to enhance your wealth-building potential, but you need to consider the wide range of risks, too.

For a deeper dive into the multifamily asset class, you can purchase Paul Moore’s book here.

If you have any questions, please contact us or use this link to schedule a call with us.

DISCLAIMER: This article is for educational purposes only and is not to be relied upon as the basis for entering into any transaction or advisory relationship or making any investment decision. Wellings Capital Management, LLC is an Investment Adviser registered with the SEC. All investments pose risk, including the possible loss of all principal invested. Past performance is no guarantee of future results. There is no guarantee that any projected results will be achieved. Investors should consider the investment objectives, risks, charges, and expenses of any Welling Capital investment vehicle before investing. For a Private Placement Memorandum (“PPM”) with this and other information, please call 800-844-2188 or email invest@wellingscapital.com. Please read the PPM carefully before investing.

The information contained in this article is for information purposes, does not constitute a recommendation, and should not be regarded as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be in violation of any local laws. All investing involves the risk of loss, including a loss of principal. We do not provide tax, accounting, or legal advice, and all investors are advised to consult with their tax, accounting, or legal advisers before investing. Information and any opinions contained in this article have been obtained from sources that we consider reliable, but we do not represent that such information and opinions are accurate or complete and thus should not be relied upon as such.

How to Analyze Multifamily Investment Opportunities in 2024

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