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How Property Performance Affects Valuations

What people are willing to pay for your property depends in large part to its current performance, or what the buyer thinks they can do with the performance after the sale. You’ll obviously achieve much higher valuations when it’s performing well vs. when it’s not, so it’s crucial to intently focus on operations. The two main things that affect the valuations are the types of financing available, and how much every dollar in NOI affects the values at the lower cap rates that we’re seeing today. After talking with hundreds of investors and multifamily owners every month, most people’s criteria is similar to this:

  1. 5 Year IRR of 15%

  2. 5 Year average cash on cash return of 10%

  3. 8% Cash on Cash in Year 1

  4. In addition, lenders require a certain debt coverage ratio to ensure the NOI covers the payments

Here’s the sales price that investors could pay on this sample property based on the returns they’re seeking:


Financing Assumptions:

Bank Loan: 1.20 DSCR, 4.75% interest rate, 20 yr amortization

Agency Loan: 1.30 DSCR, 3.85% interest rate, 30 yr amortization

Summary:

For the highest valuation for your property, it needs to be stabilized in order to get the best financing. Being stabilized to an agency lender, means the property is at 90% physical occupancy and 85% economic occupancy for 90 days prior to closing. So in the end, it all comes back to operations and property performance. Not only do good operations benefit you in the hold period, they really benefit you when it comes time to sell.

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