How to Value Multifamily Property
Understanding what goes into the valuation of your apartment building can help you improve your return on investment and assess what financing options work best for you.
- What It Means to Value a Multifamily Property
- Multifamily Property Appraisals
- Broker Price Opinion: An Alternative to Appraisals
- How to Improve Your Property's Value
- Make Sure the Property Is in Good Condition
- Invest in Upgrades
- Evaluate Your Rents
- Improving Your Multifamily ROI
- Conclusion
- Related Questions
- Get Financing
Property valuation is everything when it comes to buying or selling a multifamily property. If you need financing for an acquisition, every lender will want to know the market value of your apartment building — and its value will impact the loan terms you get. Similarly, if you’re selling an apartment complex, you need to know its value to determine the correct pricing. And, of course, it is imperative to know your asset’s market value for tax purposes.
This article will explore how multifamily properties are valued with some tips on improving your property value and obtaining a higher return on investment.
What It Means to Value a Multifamily Property
The easiest way to understand how to value a multifamily property is by looking at what it means to value any property. Property valuation, or appraisal, is the process of determining the market value of a property. This valuation is done by a professional, such as a licensed appraiser, and is based on the factors that influence the property’s value. This includes factors like location, age, condition, square footage, amenities and other important considerations.
When it comes to multifamily properties, there are a few additional factors that come into play when trying to determine its value. The most important factor is the income potential of the property. That includes things like the income from rent, occupancy rate, and any other income sources like parking fees or laundry facilities. This is especially true of larger multifamily properties.
Multifamily Property Appraisals
When valuing a multifamily property, a professional appraiser should look at several factors in order to determine the fair market value of the property. The appraiser will typically examine the property’s condition and location, square footage, and amenities, as well as its income potential.
The appraiser will also consider the cost to renovate or repair the property, if necessary. If the property requires a lot of repair, this could affect its value. In addition, the appraiser will also consider the current market trends in the area. This could influence the value of the property, depending on whether the market is on the rise or in decline.
Broker Price Opinion: An Alternative to Appraisals
If you don’t need an appraisal for financing or tax purposes, you may be able to get by with a BPO, or broker price opinion. This report is far less detailed than a formal appraisal, and is generally significantly less costly. These investigations can include just a walk around the property but may go more in depth, depending on the inspector and how deep of a report you’re looking for.
Usually, in addition to a site visit, a BPO will also compare your asset to a few properties in your market that have recently changed hands — as well as a few listed for sale. Based on these values, the broker price opinion can provide you with a good valuation of a property. Again, however, this will not be acceptable for tax or financing purposes.
How to Improve Your Property's Value
Improving the value of a multifamily property is key to getting a good return on investment. Here are a few tips to help improve the value of your multifamily property.
Make Sure the Property Is in Good Condition
You’ll want to repair any damage and take care of any regular maintenance issues prior to a property valuation. If the apartment building wouldn’t be appealing for potential residents, this will absolutely affect its valuation.
Invest in Upgrades
If your community would benefit from some quality-of-life upgrades like new amenities, making these upgrades ahead of time can help increase its value. This can include things like replacing old appliances, updating unit interiors, or even just adding appliances like a washer and dryer to units.
Evaluate Your Rents
If your property’s income is higher, its overall value will be higher. It makes sense, right? Just be careful that increasing your rents doesn’t put you at risk of elevated vacancies. If your asset is in good condition and you’ve put money into upgrades and amenities, however, rent increases are a viable option. Just note that appraisers typically look at your in-place rents on your rent roll — not the asking rents for a few vacant units.
Improving Your Multifamily ROI
Improving the return on investment, or ROI, of your multifamily property is an important part of most investment strategies. To do this, you need to ensure that you are making the most of your income potential.
While this often gets reduced down to rent increases, there are many other ways to boost ROI. Finding ways to save on expenses, for example, and boosting resident retention are critical to a good return on investment. Find efficiencies where you can, and make your residents feel at home, and you’ll likely do well.
Conclusion
Valuing a multifamily property is an important step in understanding the nature of the loan you will receive when purchasing or refinancing a property. It is essential to understand what goes into valuing the property and how to improve its value in order to increase its ROI. By following the tips outlined in this article, you will be better equipped to make informed decisions when dealing with multifamily loans.
In conclusion, understanding how to value multifamily property and then improving its value is essential to ensure a good return on investment. Keep in mind the factors that go into valuing the property, and look for ways to improve the property in order to make the most of your investment. By doing so, you will be better prepared to make the best decisions when dealing with multifamily loans.
If you’re curious about what financing options are available to you, we can talk you through the full range, whether it’s a Fannie Mae multifamily loan or financing from a credit union or life company. Just complete the form below, and we’ll get back to you with a free quote.
Related Questions
How do I prepare for an appraisal?
- The best way to prepare for an appraisal is to be organized. Gather all the documents you have related to your property, including purchase agreements, lease agreements, and any other relevant paperwork. It's also a good idea to have a list of any recent improvements you've made to the property, as well as any planned improvements. This will give the appraiser a clear picture of your property's value.
What's the next step after an appraisal?
- Once you have your appraisal in hand, you'll have a better idea of your property's value. If you're happy with the appraisal, you can move forward with your plans. If you're not happy with the appraisal, you can try to negotiate with the appraiser or get a second opinion. Either way, an appraisal is a helpful tool for understanding the value of your property.
Why is it important to know the loan-to-value ratio for an apartment loan?
- It's important for borrowers to know the loan-to-value ratio of an apartment loan, because it is a key factor in determining the cost of financing. A higher loan to value ratio means a higher degree of risk to a lender, and this often leads to higher interest rates or fees.Learn more →
What factors should be considered when valuing a multifamily property?
When valuing a multifamily property, a professional appraiser should look at several factors in order to determine the fair market value of the property. The appraiser will typically examine the property’s condition and location, square footage, and amenities, as well as its income potential. The appraiser will also consider the cost to renovate or repair the property, if necessary. If the property requires a lot of repair, this could affect its value. In addition, the appraiser will also consider the current market trends in the area. This could influence the value of the property, depending on whether the market is on the rise or in decline.
When it comes to multifamily properties, there are a few additional factors that come into play when trying to determine its value. The most important factor is the income potential of the property. That includes things like the income from rent, occupancy rate, and any other income sources like parking fees or laundry facilities. This is especially true of larger multifamily properties.
In summary, the factors that should be considered when valuing a multifamily property include the property’s condition and location, square footage, amenities, income potential, cost to renovate or repair the property, and current market trends in the area.
What are the most important metrics to consider when evaluating a multifamily property?
When evaluating a multifamily property, the most important metrics to consider are cap rate, cash-on-cash return, internal rate of return (IRR), and equity multiple. These metrics help investors determine the return on investment (ROI) of a potential investment. Additionally, the appraiser will consider the cost to renovate or repair the property, as well as the current market trends in the area.
What are the key differences between valuing a multifamily property and a single-family property?
The key differences between valuing a multifamily property and a single-family property are the additional factors that come into play when trying to determine the value of a multifamily property. These factors include the income potential of the property, such as the income from rent, occupancy rate, and any other income sources like parking fees or laundry facilities. This is especially true of larger multifamily properties. Additionally, when valuing a multifamily property, it is important to consider the potential for improving the property in order to increase its return on investment.
For more information, please see the following sources:
- How to Value Multifamily Property from Multifamily.loans
- What is Effective Gross Income? from Multifamily.loans
- Understanding Different Investment Types: Core, Core Plus, Value-Add, and Opportunistic from Multifamily.loans
What are the benefits of investing in a multifamily property?
Investing in a multifamily property can provide a number of benefits, including potential for high investment returns, the ability to take advantage of compounding returns, and the ability to diversify your investment portfolio. Additionally, multifamily properties provide reliable monthly cash flow from renters, as there is a reduced risk of vacancies due to multiple tenants.
For more information, please see the following sources:
What are the risks associated with investing in a multifamily property?
The risks associated with investing in a multifamily property include expensive purchase costs, rising construction costs, construction delays, and the possibility that the renovation work may not be enough to get the desired investment outcome.
Buying multifamily properties is significantly more expensive than buying single-family homes, therefore, it is usually hard to enter the market as a first-time real estate investor. While banks are usually eager to provide loans, buyers should be able to come with around a 20% downpayment, depending on the real estate market or the size of the property. Source
Construction costs have risen dramatically over the past few years, impacting both ground-up development projects and renovation work. Make sure you do your research and plan ahead with a strong budget before beginning apartment renovations to avoid any nasty surprises. Source
Construction delays are also an unfortunate fact of life. Due to supply chain issues, some cannot be avoided — so it may be best to take a very conservative approach in terms of your project timeline. Don’t assume you will have rents in place the month after your capital improvements are scheduled to wrap up. Source
Finally, your renovation work may simply not be enough to get the investment outcome you’re looking for. You may invest a lot of capital to add the highest-end luxury amenities to a property built in the 1980s — but if potential renters are looking for a newer building, you may not see much of an uptick in occupancy or rental revenue. Source
How can investors maximize their return on investment when investing in a multifamily property?
Investors can maximize their return on investment when investing in a multifamily property by finding ways to save on expenses, boosting resident retention, and making their residents feel at home. Additionally, investors should take great care in determining objectives regarding return on investment, or ROI. Understanding metrics such as cap rate, cash-on-cash return, IRR, and equity multiple is critical in forming ROI goals.