When you are looking at purchasing a multifamily rental property, it is important to carry out a thorough analysis of the property so that you know what you are getting yourself into. Evaluating properties well leads to good purchases and long-term success in your real estate investing business. Going through the following steps will give you a good idea of how the property is performing and whether you should add it to your portfolio.
- Know the Market – it’s important to stay on top of trends so you can determine accurate values. Make sure the building’s unit mix fits the location to attract the right tenants in the future. There are many free online reports that provide information on current conditions within your market, as well as where it may be heading.
- Do Some Simple Math – many people think that analyzing properties means carrying out complex mathematical equations, but this is not the case. Determine the rent per unit by dividing the gross rent by the number of units to give a good idea of what you can expect to make if you take ownership. Expenses can be estimated from 30 to 50% of the gross income. It’s better to be overly conservative than overly optimistic in your analysis.
- Know the Cap Rate – calculate the cap rate of the building by dividing the net operating income (NOI) by the list price. Compare the result to other buildings and what you want as a rate of return to determine if this is the building for you.
- Estimate Cost of Repairs – all buildings need maintenance, but in some cases, they may also need more extensive repairs. Repairing buildings brings up the rent, but you need to estimate the cost of the repairs and subtract this from your income. Err on the side of spending more on your repairs, just like when estimating expenses.
- Consider the Reason for the Sale – sellers sell for many different reasons. While a building may look good on paper, it’s important to find out the reason for the sale if possible. You don’t want to take over someone else’s nightmare if you don’t have to!