The price and the value of something are
two very different entities. Price is the one-time payment and this feature is
the short-term acquisition of the product. Whereas value is the long-term
aspect of purchase. Computing the value of the property is very important in
any type of real estate deal. There are d different types of methods for
calculating the value such as the cost approach, the sales approach and the
income approach. The sales approach is used widely when buying a single-family home. The cost approach is used for calculating the value of new properties. To
analyse the value of multifamily real estate the income method should be used.
Generally, people focus on rewards that
are achieved in short period of time, but wait can bring a lot more.
Multifamily investment requires dedication in the execution of the business
plan to return the maximum. Multifamily real estate requires a handsome amount
of capital. There is so much the multifamily
real estate returns that all of the stress and investment in the beginning is worth
it.
Benefits of multifamily real estate
There are a list of benefits of multifamily
investment. The most appealing of all is the cash flow. Money comes running
every month. There are benefits of trying to scale the business. It is easy to
collect rents for 20 people from the same building rather than running around
the city. With multifamily real estate money moves faster and you are rich in
no time.
Calculating multifamily investment
To calculate the value of the
multifamily investment, the net operating income is the factor under
observation. There are some factors that are essential to be known and
calculated to check the value of the multifamily investment.
Operating expenses
The cost that is required to run and
maintain the property are the operating expenses. These expenses include trash,
pest control and slight renovation etc.
Capital expenditures
A large amount has to be set for
expenses for assets that cost a lot such as air conditioners, heaters, roof
repair and carpets etc.
Net operating income
The net operating income is the annual
income generated from a property and it does not include the operating
expenses.
Cap rate
The cap rate, the rate of return on the
investment in a property is influenced by the market and the type of the
property. There are four types of properties I,I, A, B, C and D.
A type property
The brand new, most wanted assets are
the A type properties. The cash flow of this type is not very high. The cap
rate is around 2-4.
B type property
This type of property can show some
deferred maintenance but still it is a source of handsome cashflow. Cap rates
of such property are around 5 to 7.
C type property
These properties are more than thirty
years old and have maintenance issues but still the cap rate is around 8-10. They generate handsome cashflow.
D type property
The D type property is generally located
deep in the cities. They are old and cost a lot on maintenance. The rents are low and so is the cap rate.
Using cap rates to calculate multifamily value
To calculate the value of the property
the NOI is divided by the cap rate. The cap rates are inversely proportional to
the market value. When the cap rates decrease the value of the property
increases.
The value should be calculated and then
a final decision should be made. The price seems very high sometimes, but when
the investment starts to return, the investor is the happiest person around.
