Oct '24 • General discussion
Is This 400-Unit Deal Worth It?
When a Mastermind member brought us this 400-unit deal, it was a perfect chance to break down how to analyze a multifamily investment. The numbers may seem impressive, but understanding the details can reveal the true potential—or risks.
1. Rent Opportunity:
Current rents are $1,000 per unit—about $200 under market. With 400 units, this leaves $960,000 in unrealized revenue every year.
Calculation:400 units × $200 × 12 months = $960,000/year in additional revenue.
The key question: How fast can rents be raised, and what upgrades or tenant turnover will be needed to make that happen? Closing this gap could significantly boost the property’s value.
2. Operating Expenses:
Expenses are currently 55% of revenue—high for a property built in 2015. Ideally, they should be closer to 40%. Reducing these expenses would directly increase net operating income (NOI) and the property’s value.
Impact:
If expenses are reduced from 55% to 40%, the property’s profitability rises sharply, suggesting possible mismanagement or bloated costs that can be cut.
3. Cap Rate vs. Asking Price:
The seller is asking $25M, but the local cap rate is 7%. We’re using a conservative 8% exit cap rate in our calculations.
Proforma NOI:
400 units × $1,200 (new rent) × 12 months = $5.76M/year
NOI at 40% expenses = $5.76M × (1 - 40%) = $3.456M/year
Proforma Value:
$3.456M / 8% = $43.2M
This means the property could be worth up to $43.2M once rents are increased and expenses lowered. But are you paying $25M for the future potential, or for what the property is doing right now?
4. Renovation Costs:
Each unit needs about $10,000 in updates, which totals $4M for all 400 units. This upfront investment must be justified by rent increases and better tenants.
Total Investment:
Purchase price = $25M
Renovations (CapEx) = $4M
Total investment = $29M
Make sure these renovations will deliver a strong enough return to justify the cost.
5. Return on Investment (ROI):
We calculated an equity multiple of 4.02x, meaning for every $1 invested, you could get $4 in return.
Equity Multiple Calculation:
Total Profit (from sale + cash flow) = $21.93M
Total Investment = $7.25M (25% of purchase + renovation costs)
EM = ($21.93M + $7.25M) / $7.25M = 4.02x
This looks like a solid return, but it depends on successful rent hikes, expense cuts, and strong management.
My Take:
This deal has strong potential, but its success relies on raising rents and cutting expenses. If you can manage those challenges, the returns could be significant.
What do you think? Would you pursue this deal or pass?
Information presented is for educational purposes only and is not intended as, or may not be relied upon as tax, legal, investment or real estate advice. Consult your tax, legal, investment or real estate professional before investing. Information presented is not an offering.
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Is This 400-Unit Deal Worth It?
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