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.
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.
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.
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.