Riding the heels of an especially strong housing market, investors are turning more and more toward real estate as a viable and profitable business venture. One of the hottest segments of the real estate market is the multifamily housing sector. Despite being a longer process when it comes to generating income and profit than its single-family property investment counterparts, the multifamily market can be extremely profitable when executed properly.
Although it seems counter-intuitive, securing financing for a multifamily property can often be easier than getting the money for a single-family property. The reason for this is because there is a much smaller risk of not generating enough cash flow when there are multiple properties involved. What can often be confusing is calculating the value of a multifamily property because of the myriad of complexities involved. In order to calculate an accurate value, the following considerations must all be examined:
OPERATING EXPENSES: This list of expenses can be varied and long. Examples include snow removal, landscaping, pool maintenance, and pest control.
CAPITAL EXPENDITURES: Also known as CapEx, these funds are used by the property management or investor to acquire new assets or upgrade existing facilities with the intention of improving or increasing the breadth of the operation. Examples of capital expenditures in multifamily properties include new air conditioning units, roofing replacements, playground additions, water heaters, and more. Property managers will want to set aside larger amounts for annual capital expenditures if the property is older since repairs and upgrades will be more likely. Newer properties will not require as much capital expenditure investment, which will make these more attractive to investors.
NET OPERATING INCOME: This definition is self-explanatory. Net operating income is simply the total income generated from the multifamily property after the total operating expenses have been subtracted.
CAP RATE: This calculation is a little more specific. It refers to the exact rate of return from the property after income is considered. These rates are distinct to a certain market and drawn by the kind of property class of the investment. To calculate multifamily value, the net operating income of the property is divided by the cap rate. This is why knowing the cap rate is imperative to understanding the overall value.