How to Value a Multifamily Property

November 9, 2023

Adam Hoeksema

Valuing a multifamily property, be it a duplex or a large apartment complex, involves assessing finances, market trends, and property specifics. If you're planning to invest or divest, understanding its true value is essential. In this guide, we'll break down the main factors to consider and questions to address when determining the worth of a multifamily property.

What Are the Most Common Valuation Methods for Multifamily Properties

Estimating a business's value entails a thorough examination of its financial and functional dimensions. For a comprehensive overview, you might want to explore our guide, 'How to Determine the Value of a Business’.

Various techniques exist for calculating a business's value, with the optimal choice frequently rooted in the business's distinct nature and industry:

1. Income Capitalization Approach

Rationale: This method is based on the property's ability to generate income, which is a critical factor for multifamily properties given their nature as investment vehicles.

Usage: Net Operating Income (NOI): Annual income after operating expenses are subtracted.

Capitalization Rate (Cap Rate): A rate that provides an expected return on investment, used to convert NOI into an estimated property value.

2. Sales Comparison Approach

Rationale: This approach values a multifamily property by comparing it with similar properties that have recently sold in the same market.

Usage: Comparable Sales: Looks at recent sales data of similar multifamily properties, adjusting for differences in location, size, condition, amenities, and rental rates.

Adjusted Value: The comparison results in an adjusted value estimate for the property in question.

3. Cost Approach

Rationale: Primarily used for new construction, this method calculates what it would cost to replace or reproduce the property, including land value and construction costs, minus depreciation.

Usage: Replacement Cost New: The current cost to construct a similar property, including materials and labor.

Depreciation: Deduction for physical wear and tear, functional or economic obsolescence.

Land Value: The value of the land itself, without improvements.

These methods provide different lenses through which to view the value of a multifamily property, and often, a combination of these approaches is used to triangulate a more accurate valuation.

How to Calculate the Value of a Multifamily Property

1. Income Capitalization Approach: 

This method focuses on the income that the property can generate.

Estimate Potential Gross Income:

Suppose CrestView Estates can generate $500,000 annually in rents and other income.

Account for Vacancy and Credit Loss:

Assume a 5% vacancy rate, which equals $25,000 ($500,000 x 5%).

Calculate Effective Gross Income (EGI):

Subtract the vacancy rate from the potential gross income: $500,000 - $25,000 = $475,000.

Estimate Operating Expenses:

Operating expenses for maintenance, management, taxes, and utilities are estimated at $150,000 annually.

Determine Net Operating Income (NOI):

Subtract operating expenses from EGI: $475,000 - $150,000 = $325,000.

Determine Capitalization Rate (Cap Rate):

Assume market cap rate is 6% based on comparable property sales and investor expectations.

Calculate Property Value:

Use the formula NOI / Cap Rate to estimate property value: $325,000 / 0.06 = $5,416,667.

Using the Income Capitalization Approach, CrestView Estates is valued at approximately $5.42 million.

2. Sales Comparison Approach

This approach involves comparing the property to similar properties that have recently sold in the same market.

Identify Comparable Sales:

Find recent sales of similar multifamily properties in the same area. Assume the following three comparables:

  • Comp 1 sold for $4.5 million with 20 units.
  • Comp 2 sold for $5 million with 22 units.
  • Comp 3 sold for $5.2 million with 24 units.

Adjust for Differences:

If CrestView Estates has 23 units, adjustments must be made to the comparables for the number of units, condition, location, amenities, etc.

Calculate Price Per Unit:

Assuming adjustments are made, the average price per unit based on comparables is $220,000.

Estimate Property Value:

Multiply the price per unit by the number of units in CrestView Estates: $220,000 x 23 = $5,060,000.

Using the Sales Comparison Approach, the estimated value of CrestView Estates is $5.06 million.

3. Cost Approach for CrestView Estates:

The Cost Approach is based on the cost to replace or reproduce the property.

Calculate Land Value:

Assume the land where CrestView Estates is located is valued at $1 million.

Estimate Construction Costs:

  • Suppose the cost to construct the property today is $300 per square foot and the total square footage is 50,000.
  • Construction Cost = 50,000 sq ft x $300/sq ft = $15 million.

Estimate Total Depreciation:

Assuming accumulated depreciation (physical, functional, and external obsolescence) totals $2 million.

Calculate Property Value:

Land Value + Replacement Cost - Depreciation: $1 million + $15 million - $2 million = $14 million.

Using the Cost Approach, CrestView Estates is valued at approximately $14 million.

How to Buy a Multifamily Property

Multifamily properties represent a significant segment of the real estate market, offering opportunities for steady income and portfolio diversification. Considering investing in multifamily real estate? Here’s a guide to start your journey. For a comprehensive explanation, look into our guide on How to Buy a Multifamily Property.

Multifamily Property Industry Overview

The multifamily segment, a key part of the housing market, remains strong, buoyed by the growing demand for rental housing. In the US, multifamily dwellings contribute a considerable portion to real estate investments. Factors such as urbanization, demographic shifts, and changing housing preferences influence the sector's resilience and appeal to investors.

Multifamily Property Acquisition Costs

Investing in multifamily properties can range significantly based on location, property condition, and market trends. Costs can start from a few hundred thousand dollars to millions for larger complexes. The price is usually correlated with the property’s income-generating potential, often valued at a multiple of the gross rental income.

Choosing the Ideal Multifamily Property

Start your search with real estate agents specializing in multifamily properties, online real estate platforms, or through direct investment networks. Assessments should focus on property location, unit mix, occupancy rates, and potential for rent increases or value-add renovations. Consider the operational aspect and market trends for rental properties in the area.

Find Funding

Financing for multifamily properties can be secured through commercial real estate loans, multifamily-specific lending programs, or private investors. A well-researched multifamily property business plan that includes detailed financial analysis, market research, and revenue projections will strengthen your position with potential lenders.

Conducting Due Diligence

Perform thorough due diligence, including the examination of current leases, operating expenses, maintenance records, and tenant relations. Evaluate the building’s physical condition through inspections and appraise the management systems in place. This critical step can significantly affect the negotiation and final investment decision.

Closing the Deal

Negotiate the purchase based on comprehensive due diligence findings. Ensure that you have a complete understanding of the property’s financial performance and management requirements before proceeding with the transaction. With the right approach and thorough evaluation, buying a multifamily property can be a strategic addition to your investment portfolio.

If buying a multifamily property is in your plans, a Quality of Earnings Report could provide crucial financial perspectives.

How to Fund the Acquisition of a Multifamily Property

Seeking to invest in a multifamily property? Consider an SBA loan as a strategic financing pathway. Multifamily properties often qualify for SBA loans, especially when you can demonstrate their potential as profitable rental businesses. For a thorough guide on this topic, it's useful to check SBA Funding for Multifamily Property Acquisition.

When crafting your loan application, it's important to show your active engagement in property management and any relevant real estate investment experience. Providing financial details of the property’s occupancy rates and historical income can serve to solidify your application. SBA loans are advantageous for their competitive interest rates, flexible terms, and typically lower down payment requirements, making them a strong aid for those expanding their real estate portfolio.

Creating Financial Projections for a Multifamily Property Acquisition

Each multifamily property comes with its own set of characteristics, from tenant demographics to unit mix and amenity offerings.  I wrote a full guide on creating a real estate pro forma, but at a high level when creating financial projections for the acquisition of a multifamily property, you should focus on:

Gather Historical Data: Look into past rental income, occupancy rates, expenses, and net operating income.

Analyze Physical Assets: Evaluate the condition and age of the building, common areas, individual units, and any major systems like HVAC, plumbing, and electrical.

Forecast Revenue: Consider factors like market rent trends, potential for rent increases, vacancy rates, and additional income opportunities such as laundry facilities and parking.

Project Expenses: Estimate costs for property management, maintenance, utilities, property taxes, insurance, and capital improvements.

Determine Valuation: Merge all financial data, employing valuation methods like the capitalization rate (cap rate) or gross rent multiplier (GRM) tailored to real estate investments.

Utilizing a specialized multifamily property acquisition financial template can help organize and simplify this process. Such a template would consolidate income statements, balance sheets, and cash flow projections specific to real estate. With this rigorous financial analysis in hand, you're prepared to negotiate the value of the multifamily property effectively with potential sellers or investors.

I hope you've found this information useful. Should you have any questions about appraising your multifamily property, please don't hesitate to get in touch with us.

About the Author

Adam is the Co-founder of ProjectionHub which helps entrepreneurs create financial projections for potential investors, lenders and internal business planning. Since 2012, over 50,000 entrepreneurs from around the world have used ProjectionHub to help create financial projections.

Other Stories to Check out

How to Finance a Small Business Acquisition

In this article we are going to walk through how to finance a small business acquisition and answer some key questions related to financing options.

How to Acquire a Business in 11 Steps

Many people don't realize that acquiring a business can be a great way to become a business owner if they prefer not to start one from scratch. But the acquisition process can be a little intimidating so here is a guide helping you through it!

How to Buy a Business with No Money Down

Learn the rare scenarios enabling the purchase of a business with no money down and delve into the complexities of selling via seller notes, highlighting the balance of expanded opportunities and inherent risks in these unique financial transactions.

Have some questions?
Let us know and we'll be in touch.

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.