Quick Value-Add Deal Evaluation

As an investor or investment sales broker, you’re constantly speaking with owners of multifamily properties trying to evaluate a deal through the information you’re getting over the phone. Sometimes the owner is a professional investor focused on maximizing the property’s performance, and sometimes it’s a hands-off owner who’s rents are significantly lower than the market comps. Before having seen the property, let alone a T-12 and Rent Roll, you can’t value a property based on simply the NOI and the market Cap Rate, or $/Unit sales comps. More than likely, the current NOI is much lower than it could be, and you risk lowballing and killing a deal before it even starts.

The question you CAN answer (or closely estimate) with nearly ZERO information from the seller however is; How much can a bank lend on the property once it’s stabilized? Here’s how in excel;

=-PV(interest rate, term, sEGR x (1-ER)/mDSCR,0)

Example

A seller want’s $1MM for a 12 Unit Apartment Building and rents are $750/mo across the board with 0% vacancy. The market rents for similar, but updated apartments are $1,000/mo.You estimate that your expense ratio will be 40% when stabilized, to account for reassessment of taxes, management, insurance for greater value, etc. Your lender generally offers a 30 year fixed at 4.75% with a minimum debt service coverage of 1.30x

=-PV(.0475,30,144000 x (1-.40) / 1.3,0)

= $1,051,449.34

Now you have an idea of what your refinance could look like.