A lot of the more seasoned multifamily investors that I know or work with have some quick “rule of thumb” evaluation of their own that they use to very quickly decide whether or not a property is worth really taking a look at. The simplest is per unit cost; some I know use cost per bed on smaller buildings. Having these rules at your disposal and understanding how they relate to a potential multifamily purchase will:

1. Save you a lot of time
2. Make you look smarter and more seasoned than you really are!

I’m going to do some math and I’m only looking at commercial size multifamilies (5+ Units) for the purposes of this post. I’m also assuming a down payment, low-money, no money down stuff doesn’t fly and isn’t available right now so you’ll have to look elsewhere for that math.

Cost Per Unit

This is as easy as it gets. You simply divide the purchase price by the total number of units. But then what do you do with the resulting number? I made a survey of on-market multis in our service area that I’m going to release later in the week but for now I’m going to pull just a few figures out of it and use these as examples.

Parts of Boston are showing average ask prices of:
Cost per bed of $59,474
Per unit average of $123,040

Rentometer shows us that $1250 is the average rent for a 2 bed in the neighborhood. Figure on expenses eating up 45-55% of gross right off the bat (could be more). So that leaves (taking 45%) $687.50 net per month.

Figure on borrowing at a 7% interest rate to be safe (yes you can get lower rates but don’t go around doing the math with lower rates in mind). Figure on putting 25% down.

To achieve a debt coverage ratio of 1.25 your monthly nut can’t be more than $550. That means you have to pay no more than $110,000 per unit as baseline for any properties in this area. You probably only want to pay $100,000.

So if you see a 10 unit building “CASH COW” listed at $1,500,000 you now know right off the bat that if this is standard 2-bed stock this property is overpriced by $400,000… right out of the gate. Conversely you’ll be able to spot a deal from a mile away.

Obviously different areas demand higher or lower rents so if you’re not in or near Boston you have to get a feel for what your market will bear.