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How to Analyze a Commercial Multifamily Deal

Analyzing multifamily deals thoroughly before pursuing an acquisition is critical to success. There are several key factors to evaluate closely with every potential multifamily opportunity to determine if numbers will truly work out and if the risks are worth the potential rewards. Strong analysis leads to better deals and minimizes the chance of overpaying or taking on more than can be reasonably managed.

Determine market conditions
Analyze the overall rental market and specifically, the market for the type of units included in the deal’s structure and location. Look at supply and demand, vacancy rates, typical rent prices, recent price changes and overall economic trends impacting the area. Make sure proposed rents and projections seem feasible and that there is actual opportunity for increases in line with projections over the coming years. Deals with high barriers to entry and captive demand often work best in competitive markets.

Study unit mix and layouts
Ensure the unit mix, sizes, layouts and configurations meet the needs of your target tenants and command premium rents. Certain amenities, square footages and layouts within unit types rent and sell better than others depending on local preferences. Evaluate pros and cons of the specific mix proposed and look for opportunities to reconfigure or modify if needed to optimize performance before acquisition.

Determine maintenance and capital needs
Carefully evaluate the condition of the existing structure and systems to determine ongoing maintenance costs and any large capital expenses in the next 3-5 years. Lessors typically cannot raise rents enough to offset unexpected, significant costs. Make sure projections account for average annual maintenance costs as well as any necessary repairs or replacements. Get professional building audits done if needed to properly budget for future costs.

Calculate cash flow and returns
Evaluate rent rolls, income statements, proformas and projections provided by the lessor and sellers thoroughly. Ensure underlying assumptions seem reasonable and support the proposed cash flow and returns. Calculate alternative proformas with more conservative estimates for income and less aggressive estimates for expense control to determine realistic performance expectations and potential downside risks. Make sure cash flow enables meeting all obligations and repaying any debt service reasonably.

Assess risks and mitigants
No deal is without risks, determine what they actually are for the specific opportunity and evaluate mechanisms in place to mitigate damages. Things like lease terms, tenant protections, geographic and market diversification, property condition and quality of operators/managers impact risk levels and ability to work through challenge. Do your own risk assessment, do not just accept what sellers propose as risk mitigation. Make sure you fully understand all risks before moving forward with a deal.

Check valuation and ensure good value. Determine a valuation for the property based on potential income, cash flow, appreciation and market conditions to make sure the proposed purchase price represents a good value and downside is sufficiently protected. Valuations depend heavily on assumptions used and risks present, so get multiple valuations done with different assumptions/risks to ensure robustness. Only move forward with deals that demonstrate a reasonable, attractive value based on concrete analysis.

In summary, analyzing multifamily deals thoroughly to determine if numbers will truly work out before acquisition is absolutely critical to real estate investing success as an opportunity with promising projections and benefits on the surface may actually mask significant issues underneath. Careful evaluation of market conditions, unit mix, maintenance costs, cash flow and returns, risks/mitigants and valuation all provide important insights into the true opportunity and potential downside of a deal. While deals may seem attractive at face value, deep analysis often reveals the actual feasibility and suitability based on your business model and financial goals. Strong analysis and vetting leads to better decision making, fewer problems and greater prosperity over the long run. With experience, multifamily deal analysis becomes second nature, allowing you to spot both genuine opportunities and “too good to be true” promises disguised as something more. Careful deal evaluation is the foundation of a thriving real estate investment business.

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