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How to Value Commercial Multi-Family Property

The value of any given property is based on what a buyer would be willing to pay on the open market. Investing in commercial multi-family property is slightly different from typical real estate investments. There are more factors to consider when looking at a larger community than single-family units.

Investors looking at single-family units are primarily interested in comparable sales, while investors researching multi-family properties (particularly those that house more than 100 people) focus on NOI or Net Operating Income.

As you’re researching investments in multi-family properties, you should consider a few things when determining the value of the property you’re interested in. It’s essential that you take time to understand different factors influencing the property’s potential value before you make major financial decisions.

Here are a few key things you should consider when buying or selling commercial multi-family property.

Location:

The location of a commercial multi-family property significantly impacts the value. Properties in lower-income areas or neighborhoods with fewer job opportunities or higher crime rates are typically less valuable. Properties in prime locations (areas close to jobs, transportation, and entertainment) are likely to have a higher demand and the potential for higher rent prices.

While it’s not impossible to increase the value of properties in less desirable areas, it does require more work and a long-term plan.

Operating expenses:

To get a complete picture of a property’s value, you’ll need to figure out how much it costs to own the property. Typical costs associated with managing a commercial multi-family property include utilities, insurance, maintenance, repairs, loan payments, and other ongoing expenses (like garbage or property taxes).

Once you’ve determined the total operating expenses, you’ll be able to better calculate the Net Operating Income (NOI).

Net Operating Income (NOI): 

A property’s NOI is the total income minus any operating expenses. For example, a property with 100 units (all occupied) at $1500 per month has a gross income of $150,000 per month or $1.8 million per year. If annual operating expenses are $900,000, the Net Operating Income would be $900,000. It’s essential to have an accurate view of this number because it provides a reasonable estimate of the potential cash flow of a property.

When researching properties to purchase, you should ask for a document outlining previous expenses, rent, profits, etc. Once you’ve calculated the NOI using the given information, you can determine the property’s estimated value by multiplying the NOI by 10.

Using the above example, if you multiply the $900,000 NOI by ten, you can expect to pay around $9 million for the property. Market conditions could affect this number, but you can make a rough property estimate using these numbers.

Condition of the property:

The condition of a rental property affects both the value of the property and the quality of life for the tenants. A well-maintained property will likely attract renters willing to pay a higher price and continue to care for their space, which could reduce future repair expenses. Well-maintained properties can also help reduce vacancies and dips in net operating income. When considering a property’s condition, it’s essential to look at maintenance issues and management conditions.

Real estate investment can be a lucrative endeavor. When it comes to real estate investment, there is no one-size-fits-all answer. Property values vary depending on location, size, maintenance costs, and property condition. As you’re considering your next move, consider all the factors mentioned above and the amount of risk you’re willing to take for your investment. Ready for the next step? Reach out to Brick. We buy and sell commercial and residential properties in any condition.

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