Multifamily Real Estate Sales Comparables – Don’t Overpay When You Buy

by Spencer Cullor on November 28, 2012

Multifamily Real Estate Sales Comparables – Don’t Overpay When You Buy

You make your profits when you buy.  Making sure you do not overpay for investment real estate is one of the most important success factors in your real estate investing career.  It is essential to be able to determine the value of a property.  However, it should not be done in a vacuum.  One of the best ways to ensure you do not overpay and make money on your real estate investments is by comparing the property’s value with other similar properties which have sold in the same area.  Residential real estate agents call this using comparables.

Finding and using sales comparables when buying single family home is relatively straight forward.   You can easily look up past sales by number of bedrooms and bathrooms or by sale price per square footage.  It’s easy because single family homes are usually vary similar and there is a large quantity of them and a higher volume of single family home sales to compare.

Multifamily real estate and commercial investment properties can be more of a challenge when it comes to sales comparables.  You will very rarely find a similar type of property that sold recently enough to compare.  Also, because multifamily and commercial property values are determined by the income they generate, you could have two identical properties right next door to each other and they could be worth very different amounts due to different management, tenants, etc.  However, there are some great places to find comparable information for multifamily and commercial investment properties as well if you know where to look.

The best way to determine multifamily and commercial investment real estate value is by doing a thorough analysis of the property’s physical and financial status.  If you haven’t yet, check out our free report on exactly how to do this detailed financial analysis here.  After you’ve done a detailed financial analysis of the investment property and determined its value, it’s time to use “comparables” to determine if you are at the high or low end of the local market.

While commercial and multifamily comparables can be difficult to find, there are a couple really good ways to use them.  Two of the top comparable measures we use for multifamily investment properties is by using these two calculations; CAP Rates and Price per Unit.  You can learn what they are and how to apply them from our free report here.

CAP Rates and Price per unit are two measures that are commonly used by multifamily real estate and commercial real estate professionals to compare properties.  Because multifamily properties come in different sizes they can be hard to compare.  For instance, how do you compare a 20 unit building to say a 240 unit building?  By breaking down the price by the number of units, you can get an average price per unit. This will allow you to compare properties of many different sizes, ages, or property classifications.  If you compare this price to the price per unit of different properties which have sold in your area, you can get a good range of property values.  This will give you the range your property should be sold or bought in.  If you are higher than the range, chances are you are overpaying, if you are low than chances are you are getting a good deal.

CAP rates are another good way to compare your sale price with others who have sold in your area.  What I like to do is look at the CAP Rates that other properties in my area have sold for.  A few things you should take into account is how old is the property, where is it located, how big is it, etc.  Then, look at the range of CAP rates of similar types of properties in your area.  This will give you the sales range you should be in.  This is very valuable information to have whether you are buying or selling.

So, where can you find information on comparable sales in multifamily or commercial investment properties? 

A few great places to start your search is by looking at research from the major real estate brokerage companies in your area.  A few of the national real estate brokerage firms that have great research reports are Marcus and Millichap and CB Richard Ellis.  These companies produce research reports each quarter that you can get for free by registering on their websites.  These research reports can tell you very valuable information such as; what properties have sold in your area, what they sold for, going CAP rates in your area, and comparable price per unit sales information.  They can also tell you how your area compares to the rest of the US and their forecasts for how these numbers might change in the future.  Did I mention that most of them are free?

Remember, profits in real estate are made when you buy.  Single family real estate and investment real estate sales comparables are essential to buying and selling.  However, their values are determined very differently.  Investment real estate sales comparables can be very helpful in making sure you don’t overpay for your next real estate investment.  You need to have a good understanding of how values are determined and the best ways to compare the type of properties you are buying or selling.  By using available research and past sale information, you can find out if you are overpaying or underpaying for your property.

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