Why Real Estate is the Foundation of Wealth Creation
March 13, 2024
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Do you plan to invest in multifamily real estate? Every investor must know how to analyze deals before making a significant financial commitment. Careful evaluation can protect investors from committing to an underperforming multifamily asset.
According to a July 2024 report by Clever Real Estate, 90% of residential real estate investors have experienced financial losses on at least one investment, mainly due to inadequate property analysis and failure to consider key factors like location, tenant turnover, and maintenance costs.
Even a promising-looking property can be a financial setback without a rigorous evaluation process. Most investors, however, aren’t fully equipped to evaluate a property effectively. This guide will walk you through the steps to do it right — read on to learn how.
An excellent multifamily real estate investment combines high returns, steady cash flow, and long-term growth potential, making it a smart choice for building wealth. It starts with a purchase price that aligns well with the property’s actual value, ensuring you avoid overpaying and can achieve a solid return on investment (ROI). High net operating income (NOI) is another essential indicator, revealing that the property can generate consistent income after covering all operating expenses — a clear sign of profitability.
A favorable capitalization rate (cap rate) shows that the expected return matches market standards, reinforcing the property as a sound investment. Positive cash flow — where income surpasses mortgage payments and other recurring costs — demonstrates that the property will bring in extra monthly income, supporting long-term financial health. Finally, factors like tax advantages, appreciation potential, and equity buildup make the investment even stronger, setting up a multifamily property to be a resilient, income-generating asset with real wealth-building potential over time.
Evaluating a multifamily property properly is essential to ensure a wise investment. Here’s a step-by-step approach to assessing a property’s value, income potential, and long-term profitability designed to simplify the process.
Start by comparing the property’s asking price to similar multifamily properties in the same area. This comparative analysis helps you gauge whether the property’s price is competitive and reasonable. Look at recent sales of properties with similar sizes, amenities, and locations. This way, you get an accurate sense of the fair market value, helping you avoid overpaying.
The purchase price is just part of the equation. Factor in other costs like repairs, closing costs (including taxes, loan fees, and legal fees), and any immediate upgrades. This “all-in” cost is your purchase price, providing a better view of the property’s potential profitability. When meeting with the seller, ask for a pro forma statement with historical data on expenses, income, rent roll, and occupancy rates. This information lets you accurately estimate future costs and revenue.
NOI is a key metric in evaluating a property’s profitability. To calculate the NOI, take the total income generated from rent and other services (like parking or laundry) and subtract the operating expenses (like property taxes, insurance, and maintenance).
NOI Formula:
NOI = Total Income – Operating Expenses
A higher NOI generally means the property performs well and has strong earning potential. This figure will also help you determine the property’s value in the next step.
The cap rate helps you understand the market sentiment and the rate of return expected from the property. To calculate the cap rate, divide the property’s NOI by its current market value or asking price.
Cap Rate Formula:
Cap Rate = NOI / Property Value
The cap rate for multifamily properties usually falls between 4% and 8%. A lower cap rate often indicates a higher property value and lower risk, while a higher cap rate may signal higher risk but potential for greater returns.
To determine a multifamily property’s value, divide the NOI by the cap rate. For example, if the NOI is $200,000 and the cap rate is 8%, the property’s estimated value would be $2.5 million.
Property Value Formula:
Property Value = NOI / Cap Rate
This calculation can help determine if the property’s value aligns with the asking price. If the value is significantly lower than the asking price, it may be a sign to negotiate or reconsider.
Cash flow is the net income from the NOI after deducting mortgage payments — regular payments made to repay a home loan. Positive cash flow indicates the property will generate income beyond covering expenses, making it an attractive investment.
Cash Flow Formula:
Cash Flow = NOI – Mortgage Payment
Make sure the cash flow is positive and sustainable. Negative cash flow can indicate a risky investment, especially if unexpected expenses arise.
Calculate the property's income relative to the total investment, such as purchase price, closing costs, and repairs, to estimate the return on investment.
ROI Formula:
ROI = Cash Flow / Total Investment Cost
A general benchmark for ROI on multifamily properties is around 8% — although this can vary with market conditions. To maximize ROI, keep the initial investment costs as low as possible while ensuring the property remains in good condition.
Beyond cash flow and NOI, consider additional factors affecting long-term ROI, such as tax benefits, property appreciation, and equity buildup. These can increase your net ROI significantly over time and boost the overall profitability of your investment.
Net ROI Formula:
Net ROI = Total Return (including appreciation, tax benefits, equity) / Total Investment Cost
Taking a comprehensive approach to ROI helps you anticipate potential future gains, positioning you to make a more informed investment decision.
Investing in multifamily real estate has various perks to help you build consistent income and grow your wealth over time. For starters, multifamily properties deliver steady cash flow as you collect rent from multiple units monthly, similar to getting dividends from stocks. This regular income provides financial stability, covers operating costs, and boosts profits. Plus, there are real tax benefits. Since the government knows it can’t meet everyone’s housing needs, it offers tax breaks to investors who step in, allowing you to deduct things like depreciation and mortgage interest.
Suppose you’re looking to expand your portfolio fast. In that case, multifamily properties offer a quick route — you’re adding multiple income-generating units with each purchase, which means you can build your portfolio in a single deal. Thanks to economies of scale, managing one building with multiple units is way more efficient than juggling several single-family homes, making collecting rent and handling expenses more accessible and cost-effective.
Investing in multifamily real estate offers excellent rewards, but identifying suitable properties and understanding their long-term value takes experience and insight. With over 30 years in the industry and a 28% historical internal rate of return (IRR) across asset classes, I acquire and manage recession-resilient, income-generating multifamily properties that deliver strong returns.
When you invest with me, you partner with a seasoned expert who navigates the complexities — identifying key opportunities, analyzing risks, and optimizing each asset for performance. My approach helps investors avoid common missteps, like underestimating expenses or misjudging market trends, to build a portfolio designed for growth and stability.
Visit my website, BenReinberg.com, to learn more about my approach and expertise and how we can build a robust and resilient portfolio together.
