Mastering the art of evaluating apartment buildings is a strategic investment that pays dividends in time, money, and effort for both you and the potential seller. A precise assessment of value lays a solid foundation for a seamless Agreement of Purchase & Sale, streamlining the entire transaction process.
Accurate number-crunching empowers you to gauge the true worth of prospective acquisitions with remarkable precision. This discernment enables you to distinguish between properties that promise robust cash flow and those that may fall short of expectations. Moreover, integrating a proactive approach into your strategy involves identifying any underperforming buildings and addressing their challenges before extending an offer. This proactive stance optimizes your time and resources, ensuring that you invest wisely in properties poised for success.
Armed with comprehensive knowledge and insights, you enter negotiations with a sense of assurance, aligning your expectations with market realities. This alignment not only fosters transparency but also minimizes the likelihood of disappointments throughout the sales process. By mastering the intricacies of apartment building evaluation, you position yourself as a savvy investor capable of making informed decisions that yield fruitful outcomes for all parties involved
By knowing some of the industry standard numbers as discussed in other tabs you can use or adjust them according to your knowledge. When you plug them into this simple template you will quickly ascertain a rough value.
There are basic assumptions in this example but if you adjust them accordingly you will see this tool can be quite accurate. A good place to start is with CMHC and if they say the average expenses for any given class of apartment building i.e. walk-up versus elevator is 50% then it is safe to use their number as a base starting point.
This simple exercise can be done on the back of a Tim Horton’s Napkin by knowing two numbers, the purchase price and the gross revenue and a few formulas.
| Asking Price | $1,150,000 |
| # of Units | 13 |
| Cost Per Door | 88,461.53 |
| Financing 80% | 5,490.28 |
| Gross | 132,600 |
| GRM | 8.67 |
| Expenses 50% | 66,300 |
| CAP | 5.7 |
| NOI | 66,300 |
| Financing | 65,883 |
| Profit after Debt | 417 |
Calculations:
Cost Per Door Asking / Number of Units
Annual Gross Revenue Supplied
GRM Asking Price/Annual Income
Expenses Rule of thumb 50% adjust accordingly
CAP NOI/Asking Price
NOI Annual Revenue/Asking Price
Financing Here is a tip if you don’t know what the multiplier is for financing use .007 (James Bond) .007 is the multiplier for 7%.
Profit after Debt NOI – Financing
With the rising cost of utilities and the reporting of expenses to satisfy financing these buildings, most of the time have an income/expense ratio of 50% with a plus or minus of 4% and energy retrofitted buildings being much lower. Either way, it is a very easy first quick value assessment to see if further detailed analysis is warranted. By knowing the asking price and the correct gross revenue you can determine most of the key indicators.