Ask Cornerstone: What is a good rule of thumb for estimating the purchase price for a multi-unit property?
It is hard to give you a simple “Good Rule of Thumb” for estimating purchase price for multi units project because there are so many more factors than just financial figures that has to be considered.
The size of the project, number of stories, amount of open space, who pays for utilities, if the project have a flat or a pitched roof, and many other factors effect expenses which affect your return on investment (ROI). Also, the condition of the units will have to be considered before one makes an offer. The quality of the area is very important because it usually affects your vacancy rate and turnover cost, which further can have a negative affect the ROI.
Here’s an example of some of the basic information that one must know about the project before starting to form an opinion if the purchase would make financial sense. (See image below or Excel file.) In this example, I’ve set the vacancy at 5%. The historical vacancy performance of the project should be used if higher. However if actual vacancy is lower than 5%, one still uses 5%. Also many per unit costs vary significantly between 5 units project and 35 units project.
I would first suggest to learn everything you can about cost of operating the size of the units you are considering. Know the historical vacancy rate for the area and then you’ll begin to reduce your investment risk. There is no simple / easy way.