February 12, 2014
Joe Fairless

Quickly Run Numbers on Apts

Let’s talk about how to quickly evaluate an apartment building deal. It’s important because there are tons of deals out there and you have to quickly know which ones you should pursue and which ones aren’t worth your time.

Here are the 5 questions you should always ask:

  1. What’s the NOI?
  2. What are they asking?
  3. What is the upside?
  4. What is the deferred maintenance?
  5. Why are they selling?


Here it is in more detail:

First, get the Net Operating Income (NOI). That’s the #1 thing because you have to know what type of income it’s bringing in and the expenses that are going out. You’ll punch holes in their alleged income and expenses later but for now just use what they give you.

Then you’ll simply take the NOI and divide it by the asking price to determine the cap rate (the financial return of the property if you paid all cash).

For example, if the NOI is $35,935 and the asking price is $650,000 then the cap rate is 5.5%. Better be in a darn good area.

If you don’t know the asking price OR are trying to determine what you should offer for it then you need to determine the market cap rate for similar properties in that area. This is found by asking brokers or property management companies.

For example, you know the NOI is $550,000 and the market cap rate is 9%. Therefore, all things being equal, a fair price would be $6,111,111.

Some rule-of-thumb assumptions to help you run #s if you don’t have all the info:

–        No expenses given?

  • Assume between 3k – $3,500 expense per unit per year

–        No clue on debt service?

  • Assume 25% down payment, 5.5% interest rate, amortized over 25 years with a 10 year balloon payment

NOTE: there are exceptions to these assumptions and this is ONLY to be used to initially run #s and see if it meets your buying guidelines. You’ll need to get the concrete info from the seller to truly analyze the deal.

Now that you know the basic financials on the property, it’s time to dig deeper. Here are the top 3 questions you must always ask about the property.

–        What is the upside?

  • Lower than market rents?
  • Bad management?
  • Good area but property needs to be revitalized to enjoy market rents?

–        What’s the deferred maintenance?

  • Current residents treating units poorly so all move-outs will incur substantial costs to get rent ready?
  • Roof in need of repair?
  • Plumbing not where it should be?

–        What’s the seller’s motivation?

  • Is it an estate sale?
  • Is it an investor looking to quickly liquidate so they can move on to bigger properties?
  • Is it a local investor simply testing the market to get maximum value for their baby?

Here’s what we didn’t cover in this post: Market fundamentals. And, investing in the right market is the #1 most important variable of if you’ll be successful. Buy in a bad market and you’re in trouble. That’s a longer conversation for another day but just know the above post assumes your market checks out.

Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.

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