Determining Cap Rates for Multi-Family Properties

Ever wonder how to determine if a property is a good investment or not? Here’s a scientific way to do so.

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Today I’d just like to quickly show you how to create a pro forma for a multi-family property and determine your cap rate. Once you have your cap rate, you’ll know whether the property is a good investment or not.

The first thing I do is figure out the maximum potential rental income if all the units are rented for one year. Then I factor in the vacancy percentage, which is typically between 5% to 10% depending on the area. I also factor in other income, like utilities, pet deposits, and leasing commissions. Once we subtract these from the net income, we have the net operation income.

“Once you do the math, you’ll know if it’s a good investment or not.”

In the example in the video above, the property I’m looking at is listed for $550,000. After doing the math, I determined the net operation income for this property was $41,610. Now, it’s time to determine the cap rate by dividing those two numbers. It comes out to 7.57, making this a pretty good investment.

In my next video, I’ll go over some more advanced calculations for you. If you have any questions in the meantime, don’t hesitate to give me a call or send me an email. I look forward to hearing from you soon.

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