Скачать или смотреть Calculations to Use When Evaluating Multi-Residential Properties in the Bay Area, California

In our last video of this series, we would like to go over a few easy calculations commonly used to evaluate multi-residential properties

Gross Rent Multiplier is Sale Price divided by the Annual Gross Income. This is also known as the GRM. This number gives you an idea of the gross income the property generates before any expenses and loan payments.

The GRMs fluctuate with property size, number of units, and location.
Recently, Multi-residential properties have traded at a wide range. The GRM’s have ranged between 15 and 20.

The Cap Rate is the net operating income divided by the Sale Price. It is represented by a percentage and it’s a good way to assess the income of a building.

Focusing on the Cap Rate allows you to compare apartment investments to other investments such as bonds and treasuries.
And locally, Cap Rates range for 2% to 4%.

Cost per Square foot is sale price divided by rentable square feet. This is a good way to compare the cost of purchasing an older building to replacement cost. Also, this calculation is great when comparing 2 buildings with different bedroom and bath counts.

Cost per Unit is Sale Price divided by the Number of Units. This calculation does not consider the bed and bath count -it should be used in combination with the Cost per Square Foot calculation.

Here is the scenario.
A long -time client recently purchased a 6 unit building with significant deferred maintenance

What was the market like at the time? Well the Purchase closed in the Summer of 2021-the apartment market was soft due to COVID; However, it’s important to note that, while rents were down significantly, apartment values only dipped slightly. The buyer understood the resilience of the market and made his offer accordingly.

So what did our client purchase it for? $1,550,000 . As Is - all cash - no loans.

The seller was a long-term owner that allowed the property to fall into a state of disrepair. The property was delivered with 2 vacancies and one notice to vacate. This was a positive for the buyer – he had 3 units he could renovate and bring to market rents. It was not a purchase for the faint of heart. He was up against old wiring, plumbing, windows, and long-term tenants paying well-below market rents.

Let’s look at the final numbers and the potential.

As you can see, at the close of escrow the GRM was 21.69 and the CAP Rate was 1.96%.

Typically, a 6-unit building would sell for a much lower GRM, maybe a GRM of 15 or 16 and a CAP Rate of 3.5%-4.0%. So, if one were to focus primarily on the GRM and CAP Rate, this deal would not have made a lot of sense. However, a different perspective helped make sense of the deal. It wasn’t a run of mill transaction, but it made sense to the right buyer. In the end, he finished his renovation in 7 months at a cost of $175,000 re-rented units and stabilized his cash flow. The end-result: he now had a respectable 4% cash on cash return with the potential for appreciation.

In Closing, let our experience and knowledge help you achieve your real estate goals. We look forward to hearing from you!