How to Price a Multifamily Deal in Under Five Minutes
Hey everybody and welcome to short video where I’m going to show you how you can price a multifamily deal in under five minutes. My name is Anton Zajac. I’m with IntellCRE and we’ve helped hundreds of investors and agents underwrite tens of thousands of deals.
This is just condensing the strategy that we’ve seen has been very effective in really pricing a deal very quickly, figuring out whether it’s a deal that we want to pursue further or if it’s something that’s not going to work for us.
So in today’s video, we’re going to show not one but three methods how to quickly price a multifamily deal.
Method One: Cap Rate
The first one is going to be based on the cap rate. So a capitalization rate is basically your net operating income at the property divided by the price of the property.
And if you are working in a certain market where you see properties trading at certain cap rate levels, it’s very common to basically underwrite or try to analyze how much a certain property should cost by looking at the cap rates or average cap rate at which similar properties are trading and then of course looking at the NOI or the in-place net operating income at the property.
Method Two: Sales Comparables
The second method is based on sales comparables. These are similar properties that were sold recently in the same market, properties that share a lot of the characteristics with our subject property.
And really figuring out from there what has been the average price per unit in the case of a multifamily property, and then basically taking that average price per unit and looking at our property and figuring out how much our property should be on a price-per-unit basis or on the basis of the entire price for the property.
Method Three: Target Returns
And the third method is going to be using our target returns. This is a very subjective way to look at the pricing of a particular deal.
Basically saying we have a certain strategy, we have certain metrics and return metrics such as cash on cash, IRR, or equity multiple that we look for, and asking the question in reverse: how much should this deal cost in order for us to see that our target returns are met.
So I’m going to combine all these three and we’re going to jump right into the IntellCRE platform where we’re going to be able to do this in a few simple steps.
What Data Do We Need to Price a Multifamily Deal?
But before doing so, I just want to discuss what is the data that we need on the offset in order to price a multifamily deal.
So what is the data that we need in order to quickly price a multifamily deal? We need to know the in-place financials or the current financial performance of the property.
This consists of knowing the income at the property. This is a multifamily deal, so we have a number of units and we have tenants and they’re paying us rent. This is giving us rental income at the property.
And there could also be some other revenue streams such as charging for parking or providing storage that we’re also renting. This is all captured in the other income.
The rental revenue together with the other income gives us our gross operating income, or GOI.
Vacancy, Expenses, and NOI
And of course we might have some vacancy at the property. Not all the time do we have the property 100% occupied, so we should factor this vacancy into the rental revenue.
Then we also need the current expenses. Running a property includes operating expenses such as repairs and maintenance, landscaping, utilities, and property taxes.
From the current income of the property, we subtract the operating expenses to arrive at our NOI, or net operating income.
Market-Level Data and Assumptions
Then we need some market-level data to figure out how the property could operate tomorrow, after we buy it, or three or four years down the road.
We need to know what the vacancy and rent growth rate in this market looks like. We need to figure out the rent comps, which are similar properties that have very similar characteristics to our deal, and look at how much those units are rented for.
We need these numbers to calculate what the potential or market rent is at our property.
Then we look at pro forma expenses. There are no expense comps, but there are benchmarks for similar properties in the market that we can use to figure out what performance expenses could look like.
We are also making assumptions around how rents are going to grow, how the performance is going to be, and how quickly or slowly the property is going to appreciate in value over the years to come.
All of this is captured in the assumptions or market-level data that we are using.
Decision Framework
Finally, we have our decision framework. Everybody has different investment goals and objectives, but everybody has minimal returns they are aiming for when looking at a deal.
This could be a cap rate, a cash-on-cash return, or something more involved like IRR or equity multiple.
This framework allows us to price a deal by asking the question in reverse: how much am I willing to pay for this deal to make sure my investment returns are above a certain threshold?
Putting Everything Together in the Platform
Once we have everything we need to perform a quick valuation of a multifamily deal, we can jump right into the IntellCRE platform.
We put everything together and combine the three methods mentioned earlier to show how you can quickly and effectively price any multifamily deal in under five minutes.
All right, so let’s jump right into it.
Income and Rent Roll
Now that we’ve covered the three simple methods to price our multifamily deal and the data we need, we’re using the IntellCRE platform.
For current income, we uploaded a rent roll document where our unit mix is packaged together with in-place rents.
We see the current rent for each unit, along with monthly and annual totals.
Rent Comparables and Market Assumptions
We also need to figure out the potential or pro forma rent at the property.
We use the platform’s rent comparable feature, which automatically suggests rental comparables—similar properties and units in the same neighborhood that are for rent.
The platform uses those average rent figures to calculate potential rent automatically.
We also have market assumptions for rent growth at 9% and vacancy at 5%, which are pulled automatically for this market.
Expenses and NOI
Now that income is set, we look at expenses.
We uploaded a T12 trailing twelve-month statement and imported all the numbers, though they could also be entered manually.
Expenses are imported line by line, including taxes, utilities, and more.
For pro forma expenses, many investors use current expenses, though deeper adjustments can be made.
Subtracting expenses from gross operating income gives us NOI, including in-place NOI and pro forma NOI.
These numbers are critical because the cap rate method uses NOI and the market cap rate to back-solve value.
Pricing with Sales Comparables
Let’s start with pricing based on sales comps.
The platform automatically suggests sales comparables—similar properties with similar characteristics that were recently sold in the same market.
We focus on price per unit, calculate the average price per unit, and determine what the deal should be worth.
The profiles for these comps—price per unit, price per square foot, cap rates, and GRM—are very similar, which means we are using strong comps.
The platform shows a pricing result between $2.2 and $2.5 million.
That’s how simple it is.
Pricing with Cap Rates
Next, we use the cap rate method.
Knowing that similar deals are trading at a 5.2% cap rate, we back-solve from the in-place NOI.
This results in a pricing range between $2.3 and $2.6 million.
These two methods overlap at $2.4 million, which aligns the valuation.
Pricing with Target Returns
Finally, we look at returns.
We review returns on the right side and make sure we are hitting minimum return thresholds such as equity multiple, IRR, or cash on cash.
We adjust the price until those thresholds are met.
Final Thoughts
There you have it. Three simple methods.
Using the cap rate to price a multifamily deal.
Using sales comparables to price a multifamily deal.
Using your own investment goals and minimal target returns to solve for the highest price point that still satisfies your return metrics. This could be cap rate, cash on cash, IRR, or equity multiple.
All three methods allow you to quickly price any multifamily deal, and we’ve shown how easily this can be done in the IntellCRE platform.
I hope this was helpful. Please like or subscribe if you like this content and want more videos on pricing deals, financial analysis, and real estate marketing.
Stay tuned, and thank you very much.
