3 Metrics Crucial For Finding Amazing Apartment Building Deals

From biggerpockets.com:


3 Metrics Crucial for Finding Amazing Apartment Building Deals

by Michael Blank

How do you know if an apartment building is a good deal? In this article, I give you the 3 main indicators and rules of thumbs to find out.

You’re interested in apartment building investing, and you see a bunch of multifamily properties for sale on Loopnet. Maybe you’re even (yikes) thinking of making an offer. But how do you know if the asking price is reasonable? And if it’s not, what price makes sense?

The 3 Main Ratios for Valuing Commercial Real Estate

There are 3 main ratios for estimating the value of an apartment building. Here they are:

-Capitalization Rate (a.k.a. the “Cap Rate”)
-Cash on Cash Return
-Debt Service Coverage Ratio

Let’s talk about each in turn. I’ll cover what they are, how to use them, and what value to look for in a good deal.

Key Indicator #1: The Cap Rate

In order to know the fair market value of a building, we need to know its “cap rate” and its “NOI.”

The NOI is the net operating income, and this is the income after all expenses but before debt service (i.e. the mortgage payment).

The cap rate is a multiplier that is applied to the NOI to determine the value of a building. It’s like saying that the building can be valued at “10 times its net operating income.”

The cap rate is the rate of return if you were to buy the building 100 percent in cash. You probably wouldn’t do that, but this is the standard way to measure the returns and value of a building…


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