Sample review: 28-unit apartment property
Illustrative example — not an available property
The buyer’s criteria
- Property type
- Multifamily, 20 to 40 units
- Market
- Broward County, east of I-95
- Budget
- $4 million to $6 million
- Target return
- 6.5% cap rate on the purchase price
- Timing
- 1031 replacement, 180-day closing deadline
The property reviewed
- Building
- 28 garden apartments, built in the early 1970s
- Area
- Within the buyer’s target market
- How it was found
- Not on the market; the owner was contacted directly
- Reviewed
- Rent roll, 12 months of operating statements, the tax roll and the last recorded sale
Income and pricing
| Gross potential rent | 28 units × $1,650 × 12 months | $554,400 |
| Vacancy and credit loss | 5% of gross potential rent | −$27,720 |
| Other income | Laundry and parking | $12,000 |
| Effective gross income | $538,680 | |
| Operating expenses | 42% of effective gross income (assumption) | −$226,246 |
| Net operating income | $312,434 |
Value at the buyer’s 6.5% target cap rate: $312,434 ÷ 6.5% = $4,806,677, rounded to $4,810,000, about $172,000 per unit.
Assumptions
- Rents as on the rent roll, $1,650 a month on average
- Vacancy and credit loss at 5% of potential rent
- Operating expenses at 42% of effective gross income, a planning ratio until the statements are verified
Still to verify before an offer
- Roof age and the cost of wind insurance at renewal
- Rent roll checked against signed leases and deposits
- Property taxes after the sale, once reassessed at the purchase price
- Milestone (recertification) inspection status
- Deferred maintenance found at the site visit