Want to Spot a Great Deal? Here’s How I Do It

Over the past 25 years, I’ve acquired more than 3,000 apartment units. I’ve learned a lot along the way, and I know how tricky it can be to find the right deal. Here’s my simple, step-by-step approach to analyzing multifamily deals:

Step 1: Calculate the PROFORMA (Stabilized) Value. This is the value of the apartment after it reaches market rent and is operating smoothly.

To calculate:

-Take the gross proforma rent

-Factor in the building’s age

-Use the local market CAP RATE

Example:

If current rent is $1,000/month, but market rent is $1,300/month for a 100-unit, 50-year-old building in a 7% cap rate area, the calculation looks like this:

Proforma Value = [$1300 x 12 x 100 units x (1 - 50% operating expenses)] ÷ 7% cap rate = $11.14M

If the asking price is too far above the proforma value (let’s say they’re asking $15M), I’ll walk away. No point wasting time if it’s not a good deal.

But if the asking price is reasonable, say $9M, and I estimate $10K per unit for renovations (totaling $1M), bringing my all-in cost to $10M, I’ll move on to Step 2.

Step 2: Calculate the Property’s Returns. There are two ways to profit from a property:

-Cashflow

-Profit from resale

For resale, let’s say I sell in 5 years. I’ll net around $1M ($11M - $10M).

Now for cashflow:

-Assume an interest-only loan at 8% with 20% down.

-Proforma NOI = $780,000

-Debt service = $640,000

-Stabilized cashflow = $140,000

Step 3: Calculate Key Metrics. Next, I calculate Cash-on-Cash Return, Equity Multiple, and IRR.

I’ll break these down in more detail in the next post. Comment below and I'll tag you once it's up so you don't miss it.

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