Steven Taylor of Taylor Equities -How to Find the Value of a Multi-Unit Real Estate Property

In other articles, I’ve covered the many benefits the multifamily sector of the real estate industry provides. But, how do you find the value of a multi unit real estate property? Knowing how to calculate the value of a multifamily investment should be an important part of your strategy.

When investing in multifamily units,like Taylor Equities, it comes down to the net operating income of the property. The investor should make a purchase based off of a stream of income.

Understanding these factors will help determine the net operating income of a building in order to find the value of a multi unit real estate property.

Operating Expenses

Operating expenses include any costs that are incurred while maintaining and running a property. This could include services such as trash removal, pest control, and other regular maintenance services needed on site.

Capital Expenditures

Capital expenditures are expenditures for assets that improve or extend the life of an existing asset, for a period to exceed one year. Examples of capital expenditures include maintenance or repairs to items such as roofing, AC units, water heaters, driveways, etc. Your capital expenditures won’t always affect the value of your assets. But, improving how assets function can affect your cash flow.

Net Operating Income and Cap Rate

Your net operating income is your annual income that is generated by the property after your total operating expenses.

Your cap rate is the rate of return on your investment based on the annual income. Cap rates are specific to each market and can be affected by the property class that you invest in.

These are the types (A, B, C, and D) of multi unit real estate properties:

● CLASS A: These are the newest and most high quality properties. They often offer extensive amenities. With Class A, you can expect lower cap rates. This class can initially offer poor cash flow, but often appreciates with time. In many ways, A properties are owned by investors in order to maintain their wealth, not to build it. Expect cap rates: 2–4

● CLASS B: Class B buildings were built within the last 20 years. Buildings in this class usually attract a combination of blue collar and white collar tenants. Class B properties may need a little maintenance, but still have potential for appreciation. Because they are more approachable, they can see improved cash flow. Expect cap rates 5–7

● CLASS C: C properties are sometimes considered to be the “bad” properties, but they also have a substantial ability to generate cash flow. Properties in the C category are usually over 30 years old and come with a variety of maintenance issues. Expect cap rates: 8–10

● CLASS D: If C properties are “bad”, D properties are worse. These properties are often found in the inner city. Tenants in these buildings don’t always pay rent, and vacancies are common. D properties need extensive repairs and maintenance, and can require a lot of work to manage. Many investors new to real estate invest in D properties because they can get a deal, before they realize how much work they have cut out for them.- Steven Taylor Taylor Equities

Originally published at https://steventaylorla.kinja.com on April 1, 2020.