Multi Units is not as difficult to own as it may seem. Like any other discipline, successful investing in multi-family dwellings can be learned and private capital can be raised to acquire these units if you have the proper education.
The purpose of this article is to provide you with the understanding of the basics of Las Vegas Apartments for Sale valuation, what capitalization rate is, and how increasing revenue or decreasing expenses can create massive amounts of equity.
The truth is that an investor will overpay for any Las Vegas Multi Units if he or she does not know how to establish proper value. In a single family unit, paying an extra $10,000 for a property may cause you to take a small loss but you can still recover.
If you overpay for a 60 unit apartment complex, you may not be able to achieve a profitable cash flow, and this mistake can end the career of a new investor. Therefore, understanding how to determine the value of an Las Vegas Multi Units for Sale, and how to positively impact that value, will lead to great profits.
Apartments for Sale
Determining value for apartments is different from determining value for single family units (SFU). SFU’s values are determined by comparables of like sized units with similar amenities within a close proximity. A 3 bed / 2 bath house with a 2 car garage and a swimming pool with a total of 1500 sf in a neighborhood will most likely sell for the same price as the identical house within that neighborhood. However, a 30 unit apartment complex will not sell for the same price as another 30 unit apartment complex. What is the biggest difference?
With Las Vegas apartment complexes, you are not buying based on the square footage as much as you are buying based on the revenue stream the property is producing. In order to understand how to analyze the revenue stream, it is important to the basics of value determination. The following are the basics for Las Vegas Multi Units.
- Expenses- all expenses other than debt service & capital expenditures
- NOI- Net Operating Income (Income minus expenses)
- Debt Service- Mortgage
- CADS- Cash After Debt Service (NOI minus Mortgage)
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The most important item listed above is NOI. The goal of any successful Las Vegas Multi Units is to impact the NOI buy increasing revenue and/or decreasing expenses. The higher the NOI, the more Cash After Debt Service is available. Also, the NOI impacts the value of a Las Vegas Apartments for Sale property, as the value is determined by the revenue stream through the Capitalization (cap) rate. The average cap rate in an area details the ratio of NOI to its price. To better understand the cap rate, it is important to understand its equation: Cap rate = Net Operating Income / Price.
For example, if the NOI=$100k and the price=$1,000,000, the cap rate would be ($100,000 / $1,000,000) =10%. A simple way to look at the cap rate is as a return on investment. If your cap rate is higher than the average cap rate in the area, then you may make the assumptions that your return is greater because more risks are involved in owning the property.
Specifically, the Las Vegas Apartments for Sale may be older and not in as good condition. Therefore, rents may be lower and since more repairs and maintenance can be expected, expenses will be higher. Therefore, if you have a higher cap rate, there is more risk so it will be less of an investment to purchase the revenue stream.
Conversely, if your cap rate is lower than average in the area, then you may make the assumptions that your return is less because there are fewer risks involved in owning the Las Vegas Multi Units and Apartments for Sale. Specifically, the property may be newer and in good condition.
Therefore, rents will be higher and since less repairs and maintenance can be expected from a newer facility, expenses will be lower. Therefore, if you have a lower cap rate, there is less risk involved so it will be a greater investment to purchase the revenue stream.
Generally speaking, there are four classes of property for Las Vegas Multi Units and Apartments for Sale apartments (A, B, C, or D) that will help determine the Cap Rate you use: Class A- Built within the past 10 years or so; good quality renters with good jobs; very little maintenance / repair issues. General Cap Rate range will be between 5-7%.
Class B- Built within the past 20 years or so; tenants mix of white and blue collar and has some deferred maint / repairs. General Cap Rate range will be between 7-9%. Class C- Built within past 30 years or so; tenants mix of mainly blue collar workers & subsidized housing and has maint / repairs. Tenants may be renters for life. General Cap Rate range will be between 10-12% Class D- Built 30 years plus, usually found in ‘bad’ areas filled with bad tenants.
If ‘D’s are in a ‘C’ or ‘B’ area, you may reposition to higher Cap Rate. General Cap Rate range will be 12% or more. Again, these class valuations are rules of thumbs only. You may have a 40 year old Las Vegas Multi Units and Apartments for Sale that has been repositioned, or fixed up, and is in Class B condition. But for valuation purposes, the above information will assist you in proper value determination.
If the equation for Cap Rate is Net Operating Income divided by Price, then the equation for price, or value, must be NOI /CAP. For example, if the NOI=$100k and CAP = 10%, then the value, or price=$1,000,000. Therefore, the cap rate has a significant impact on price. The lower the cap rate, the higher the price as illustrated below: EX: If the cap rate is 12%, then $100,000 /.12= $833,333 value.
This equation means that if you want to purchase the revenue stream of $100,000 in this older Las Vegas Multi Units and Apartments for Sale building, the cost of acquisition would be $833,333. If the cap rate is 6%, then $100,000 /.06= $1,666,667 value, which means you would need to pay significantly more to acquire the same revenue stream. Obviously, when determining value, the two items you are required to accurately calculate is the cap rate and the NOI.
The following are 8 helpful steps to assist you in properly determining the value of an Las Vegas Multi Units:
1) Log onto your Las Vegas county’s property appraiser or assessor’s web site to obtain the tax assessed value of the property under consideration
2) Search Clark County property tax rolls for recent sales of 3-5 properties that are comparable in size, amenities, and features and located within 2 miles of the property under consideration
3) Analyze any comparable properties that you find, and make sale price adjustments for differences in amenities, special features, and the Las Vegas Multi Units and Apartments for Sale property’s physical condition.
4) Verify the income and expenses that are listed on the income and expense statement of the property under consideration to ensure that the NOI is accurate
5) Analyze the property’s income and expenses for the past 12 months to estimate it’s NOI POTENTIAL
6) Calculate the property’s CAP rate by dividing it potential operating income by the estimated value that you derived from analyzing recent sales of comparable properties in Step 3.
7) Estimate the Las Vegas Apartments for Sale value by multiplying its NOI by the Cap rate you came up with for the property
8) Calculate the cost of replacing the improvements on the Las Vegas Apartments for Sale using the same building materials and method of construction. Now that we understand how to properly determine the value of an apartment complex, what can we do to increase the value?
Remember, the equation for value, or price, is NOI /CAP. Therefore, if we increase the NOI, we will increase the value of the property. The NOI is impacted by increases in revenue and decreases in expenses, so if we are able to impact either of those equations, we will increase value.
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The following is an example of a Apartments for Sale: Asking Price – $1,000,000 AREA CAP -8% UNIT: 34 Apartment information:
- Income- $180,000
- Expenses – $86,000
- NOI- $94,000
- Value= (NOI / Cap) $94,000/.08=$1,175,000
- Debt Service – $70,000
- Cash After Debt Service = $24,000
Based on the $2000 per month cash flow and the $175,000 of equity in the Las Vegas Multi Units, Apartments for Sale property would qualify for an offer. The next step is to perform due diligence in order to determine if I can increase the revenue or decrease the expenses for this property.
Upon performing due diligence on this property, I found that the occupancy rate was 100%. This high rate means that the rents are too low. By raising rents only $25 per month, I would increase revenues by ($25*34=) $850 per month, or just over $10,000 per year.
How would $10,000 of increased revenue improve the value of my property? Ex: $10,000 / .08 = $125,000 ($10k was the increase in my NOI / Cap rate). So by increasing rents only $25 per unit per month, I am able to add $125,000 of value to my property! Upon performing further due diligence on this Las Vegas Multi Units and Apartments for Sale, I found that the owner was paying about $4500 per year for cable and about $12,500 per year in water. Both of these costs could be transferred to the tenants, which would cause an increase in their costs of about $41 per month (not too unreasonable).
How would passing $17,000 of expenses along to my tenants improve the value of my property? Ex: $17,000 / .08 = $212,500 ($17,000 was the increase in my NOI / Cap rate). Suppose I could add $61 of expense to my tenants immediately and not lose more than 2 or 3 tenants.
The following would be my new financials: Income- $190,000 Expenses – $69,000 NOI- $121,000 Debt Service- $70,000 CADS- $51,000 (More than $4k per month!) Value= $121,000/.08=$1,512,500 Purchase price = $1,000,000 Equity = $512,500 If you sold the property for what it was worth, you would make a pre-tax profit of $512,500. If you decided to refinance the property to pull cash out, you could do so and keep the money without paying taxes.
But what if you decided to reinvest in another Las Vegas Apartments for Sale complex? With a 1031 exchange (see your accountant to find out all the rules), you could reinvest that $512,500 into an apartment complex worth $5,125,000. What kind of cash flow could you bring in on a $5 million dollar apartment complex? In summary, this article provided you with the basics of understanding how to determine the value of apartment complexes, which is NOI / Price.
This article also explained how to determine value. Finally, it used an example of how adding income or reducing expenses to a Las Vegas Apartments for Sale could drastically increase the overall value of an apartment complex. By further educating yourself on this strategy, you can drastically increase the monthly amount of passive income that you receive in addition to increasing your net worth.
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