Let's discuss how to quickly evaluate an apartment building deal. With so many deals available, it's crucial to determine which ones are worth your time. Here are five essential questions you should always ask:
- What is the net operating income (NOI)?
- What is the asking price?
- What is the upside potential?
- What is the deferred maintenance?
- Why is the seller looking to sell?
Let's delve into a bit more detail about these questions:
First, it's important to find out the NOI. This is crucial information because it helps determine what type of income the property generates and what expenses are being incurred. You will need to verify their income and expenses later, but for now, use the figures they provide.
Next, take the NOI and divide it by the asking price to determine the cap rate (the financial return of the property if you paid all cash).
For example, if the NOI is $35,935 and the asking price is $650,000, then the cap rate is 5.5%. This is a good rate for a property located in a desirable area.
If you don't know the asking price or are attempting to determine what you should offer, then you will need to find the market cap rate for similar properties in that area. One option is to ask brokers or property management companies.
For example, if the NOI is $550,000 and the market cap rate is 9%, then a fair price would be $6,111,111.
Here are some rule-of-thumb assumptions that can help you run some numbers if you don't have all the information:
- Assume between $3,000-$3,500 expense per unit per year if no expenses are given.
- Assume a 25% down payment, 5.5% interest rate, amortized over 25 years with a 10-year balloon payment if you have no idea about debt service.
NOTE: these assumptions are not always accurate, and should be used initially to run some numbers and determine if the deal meets your buying guidelines. To truly analyze the deal, you will need to obtain concrete information from the seller.
Now that you know the basic financials of the property, it's time to dig deeper. Here are the top three questions that you must always ask about the property:
- What is the upside potential?
- What is the deferred maintenance?
- What is the seller's motivation?
Here's what we didn't cover in this post: Market fundamentals. Investing in the right market is the most important variable for success. Buying in a bad market can result in failure. This is a longer conversation for another day, but it's important to know that the above post assumes that your market is performing well.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.