How to Analyze an Apartment Deal - the RIGHT Way!

In my post yesterday, I revealed why you should not buy an apartment building based on the current NOI or based on actuals. This is the exact opposite of what the gurus teach and some of you here got confused and even irritated by this.

Below are the steps to deciding the price to offer on an apartment building:

Step 1: Calculate the PROFORMA value of the property based on YOUR ANALYSIS

Notice I did not say, buy the property based on the PROFORMA value of the seller or broker. Doing so is foolish because you're buying someone's "dream scenario" - which can become a nightmare for you (LOL).

Instead, do your market analysis to find the current market rent of the property.

Then, based on how you can operate the apartment building - based on its age and location, you can decide the operating expense ratio (whether it's 50% or higher or lower).

Based on that, you can estimate the proforma NOI (net operating income). Then based on the location, (and again, you have to do market research), you can estimate the location cap rate.

The proforma value of the apartment building is then...

Proforma NOI/ location cap rate.

Step 2: Estimate the Investment Needed to Buy the Property

This number is based on 2 things:

The downpayment you need to bring; and
The cost of renovation or capex

Renovation can be included and 75% of that can be financed by the lender as well.

Initially, I base my renovation estimate just on the photos of the exterior and the inside of the apartment units. After my LOI gets accepted is when I go out and estimate the renovation thoroughly.

Step 3: Determine if the Investment Meets Your Metrics and If So, Submit an LOI (Letter of Intent)

Based on the Investment required, now you can calculate 2 things:

the Cash on Cash return (CoC); and
the Equity Multiple (or Multiplier) or EM in short

I want apartment buildings with a CoC of 6-8% per year average over a 5-yr time frame and an EM of 2.5x or higher.

You decide what CoC and EM are right for you.

NOTE: I usually look for EM of 3x or higher but I advise my Mastermind members to look for an EM of 2.5x because at that rate, they can give their investors an EM of 2x by doing a 70/30 LP/GP split (LP = passive investors; GP = you and your team putting the deal together).

If you want to learn, step-by-step how I analyze apartment deals, attend our live podcast tomorrow night (May 17, 8 PM Eastern). Comment "MFH" below to get the registration link.

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