How to Analyze a Multifamily Real Estate Deal in 4 Steps

Multifamily property deals are a fantastic way to make a foray into real estate investment. However, it takes a lot of research, analysis, and ground work to find an investment deal worthy of negotiation and closing. For most real investors, especially novice, navigating your way through the market for a profitable multifamily real estate deal requires strong analysis and experience. Developing an analytic baseline for your submarkets, using spreadsheets for deal analysis, studying tenant demographics, location viabilities, etc. are the key to a fruitful investment.

So, how to analyze a multifamily real estate deal like a pro? Let us share the step-by-step process:

Step One: How to conduct research

All of us make notes of the prospective multifamily real estate deals that we come across in various channels. While we do so, it is very important to note down any questions that help us analyze the commercial viability of each deal.

For example, if you note that the property has a high vacancy rate, then note down the query and follow through with diligent research. If a profitable multifamily deal is available when it is not the right time to sell, then analyze why the current owner is selling now to see if it is a worthwhile deal.

Also read: Multifamily Deal Analysis: 3 Core Concepts You Must Know

Step Two: How to analyze numbers

Spreadsheets are a valuable tool when it comes to analyzing the seller numbers of various deals that catch your attention. Always rely on spreadsheets for property analysis. The numbers you have allotted to each deal in the Offering Memorandum can serve as a basis for the same.

Multifamily real estate investment analysis by sellers’ numbers can also help you trace how the seller arrived at their price. Usually, there are two sets of numbers to refer to: the pro forma income plus expenses, and the current property income plus expenses. But, one must be cautious as most Offering Memorandums that you come across are a result of calculated guesswork and assumptions.

Step Three: How to analyze a multifamily real estate deal w.r.t. historical operating data  

Historical Operating Data or Annual Property Operating Data (APOD) are based on financials such as Property Rent Control, Annual YTD Profit & Loss statement. The Historical Operating Data for any property asset is drafted on a year-to-date basis. As the buyer, you must ask for them proactively as no seller party usually offers the same upfront.

The current and historical financials of an asset under consideration, play an important role in multifamily real estate investment analysis. It helps us suss out the actual, current property financials, without any embellished, pro forma figures. It also offers some educative insight about how realistic the seller’s asking price is and whether they are serious about the deal.

Also read: 5 Proven Ways to Invest in Real Estate with Little or No Money

Step Four: How to use Proforma assumptions

The final step is all about envisioning the asset as one that you already own. Analyzing the commercial viability is crucial at this step. Ask yourself the pertinent questions that will help you decide that; such as- Will the asset perform well under your care? How soon can it pay off the cost of investment and start earning profits?

For the multifamily real estate investment analysis it is safest to rely on a spreadsheet. The spreadsheet should help you calculate the capital expenditure, assorted expenses, projected income, and debt services. Consult local tax assessors to see if there is any change in dues, look for handymen services who can offer you an estimate for tidying up the property. Also, counseling experienced multifamily real estate investors is a good way to learn about the ‘do’s and don’t’ of the business, for e.g., how to maintain realistic pro forma assumptions.

Strong, strategic analysis is of utmost importance if you want to arrive at the ‘right’ price to offer for a potential multifamily real estate deal. Thorough analysis for any property deal and not just the ones involving multifamily real estate, is a profitable skill to cultivate.