Matt Garabedian talks with us today about how to quickly analyze multi-family deals. He shares what factors to consider when determining your offer price.
Matt shares some tips on what to look at when considering an apartment deal. From the local to the mix of units, you need to have perform your due diligence.
Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Matt: Hi, this is Matt Garabedian with Phenom Investor. Today, I’m your host for REI Classroom and the topic we’re going to be talking about today is how to analyze apartments like a pro.
Mike: This REI classroom real estate lesson is sponsored by theinvestormachine.com, FlipNerd’s private investor coaching program and your blueprint to investing success.
Matt: So many of us who have gotten into the multi-family market have heard various ways to do your due diligence. Well, there’s a lot of great information out there and over my experience, I’ve found some great tips that you could use to analyze properties like a pro, specifically multi-family.
So some of the things that I would suggest that you do is, number one, pay attention to the location, not just geographically, but you’re going to want to look at the market and what it’s doing. So what I like to do is I like to drive around the neighborhood, I like to see a couple things, if there’s a lot of “for rent” signs in the neighborhood, that means that vacancy and asking rents may be out of line. So if there’s a lot of vacancy, it’s not a really desirable neighborhood, and if there is asking rents that are not in line with what your pro forma looks like, you need to reevaluate your numbers.
Also, another great tip is to look at crime statistics in the area. Those are usually readily available at the local police department. And I want to look at, you know, what are the crime statistics for the neighborhood because that’s going to affect the desirability of the units, of course, and the type of tenant base that you’re going to be managing. So those are some very specific things that I like to look at when I’m looking at a location.
The second thing is, I’m looking for value add and upside. So I want to see if I could find an apartment complex that has rents that are below market. And what this allows me to do is two things. Number one, I can negotiate a lower price with the owner because his rents based on the capitalization rate aren’t up to market. So I can negotiate that I have to raise rents, it might create some vacancy issues for me for the time being so I can negotiate a better price.
So look for neighborhoods where the rents are currently low and have the ability to be increased over time. This, obviously, is a huge benefit to you as the new owner because that’s going to steadily increase your NOI, which brings me to my next topic. Look at your unit mix. If the complex is predominantly one-bedrooms or studios, you’re going to be limited to what you can raise the rents to. If the unit mix is two, three or even four bedrooms, usually, those command a higher asking rent for the market. More families will look to rent the place, they stay longer, and you can get more rent for a bigger unit mix.
The next thing I’m going to talk to you about is understanding your net operating income. Now, this is the magic number in analyzing any apartment deal. You need to understand how to analyze an NOI to get your cap rate or your cash-on-cash return. Both of these numbers are critical in negotiating the best deal so, as a buyer, you want to get, obviously, the highest cap rate. As a seller, you want to sell for the lowest cap rate. Those are two things that are huge in analyzing the deal. Understand your cap rate. Here’s a quick tip, if you don’t know the numbers, take 50% of the gross expenses out of the gross income. So I’m going to take gross income, take out 50%, I’m going to get a quick NOI.
So those are some quick tips you could look at to analyze your next apartment deal. I’ll be happy to talk to you about that. Email me at any time and we’ll look forward to you on the next quick tip show. Look forward to seeing you on the next REI classroom. Thanks for tuning in.
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