Evaluating Multi-family Properties - Posted by Mike
Posted by Mike on July 27, 2003 at 16:57:19:
I am looking for some advice on evaluating multi-family properties (6-flata & up).
Up to this point, I have invested mostly in duplexes except one that is a 3 unit. All of these units have separate utilities, some may have common water. I am investing in the Northwest suburbs of Chicago in Kane & McHenry counties.
When I evaluate 1-4 unit buildings I plug in the current monthly rents, allow for a 4% vacancy factor, subtract monthly expenses for taxes, insurance, water/sewer (if not separate). I then figure $50.00 per unit/per month for maintenance and repairs, and 8% for outside management. Currently I manage all of my own properties but, I figure it in so there is enough there if I decide to hire an outside manager. I have invested in duplexes thus far and I have the tenants take care of the lawn as part of their lease.
I am looking to get into larger units, 6-flats, possibly larger. In evaluating properties over 4 units, the value is bases largely on the Net Operating Income, NOI. Currently I plug in the current monthly rents, allow for a 4% vacancy factor, and subtract monthly expenses for taxes, insurance, gas, electric, water/sewer and garbage. I then figure $50.00 per unit/per month for maintenance and repairs, and 8% for outside management, I currently manage my own units, but I figure it in anyway to arrive at what I believe is a more accurate NOI, and by using a Cap Rate of 7-8%, depending on building condition, to arrive at a value.
This is where I run into a problem. What about lawn maintenance during the warmer months (7 months) and snow removal during the colder months (4 months). What about replacement reserves? What about advertising for vacant units? What about common area cleaning? Should I figure that these items are included in the $50.00 per unit/per month, or should I add them on? This really reduces the NOI, Cap Rate and Return on Investment. It also reduces the calculated value greatly. It seems that none of the realtors or sellers figure all of the true expenses and inflate the NOI.
The question is: What is a good formula for arriving at a realistic NOI and therefore value, on properties over 5 units?
I would greatly appreciate your input.