How Property Is Valued: Single Family vs. Multifamily

Overall, single family home values are derived from the most recent sales of other houses nearby that are of similar size and type.

Multifamily (+4 units) properties are valued by the profit (Net operating income/NOI) generated after all expenses. 

There is only so much you can do to a single family house to increase its value because the majority of the value is determined by outside sources. On the other hand, multifamily property values can be increased by reducing costs or increasing income.

A no expenses example:

Adi buys a 10 unit multifamily property that costs $500,000. The property area has cap rates of 10% and the property generates $50,000 profit (net operating income). Each unit is rented at $416.67.

$416.67 x 10 units = $4166.70 monthly income

$4166.70 x 12 months = $50,000 annual income

So Adi makes $50,000 per year from her property that is valued with a 10% capitalization rate.

Dividing her profit of $50,000 by the cap rate .10 = her property value is $500,000.

In this scenario for every additional dollar that she makes of income her property increases in value by $10.

So now Adi raises the rent on each of her units by $25 per month.

$441.67 per unit per month x 10 units = $4416.70 per month.

$4416.7 x 12 months equals $53,000.40 of income.

 $53000.40 ÷ .10 capitalization rate = $530,004. This is her updated property value.

In the beginning, I began investing strictly for cash flow. My properties have also gained a lot of value by way of appreciation, due to the economic recovery and the markets I chose in Atlanta. Now I have an eye out for both cash flow and appreciation in multifamily apartments and mobile home parks of 5+ units, but cashflow is the most important as it can also provide a buffer during an market downturn.

The reason I originally went for cash flow was to supplement my income and to have more control over the amount of desired cash flow each month. I like to stay active and believe in the simple fact that no one can predict markets, but I can control my actions and input regarding a property.

Once you gain some experience and an understanding of market analysis and the tools to use, you can make more informed and educated investments. But nonetheless, timing markets is virtually impossible… just ask Warren Buffett.