Unlocking Property Value: The Power of Performance and Financing
The value that potential buyers are willing to attribute to your multifamily property hinges largely on its current performance and, equally crucial, what they believe they can achieve with it post-sale. It's evident that higher valuations are attainable when a property is performing well compared to when it's not. Therefore, an unwavering focus on operational excellence is paramount. The two primary factors influencing valuations are the available financing options and the extent to which every dollar of Net Operating Income (NOI) influences property values, especially in the context of today's lower cap rates.
In our regular conversations with countless investors and multifamily property owners, a common thread emerges—most individuals have similar criteria:
A 5-Year Internal Rate of Return (IRR) of 15%.
A 5-Year average Cash-on-Cash return of 10%.
An 8% Cash-on-Cash return in Year 1.
In addition to these criteria, lenders often stipulate a required Debt Coverage Ratio (DCR) to ensure that the NOI adequately covers the mortgage payments.
Here's a glimpse of the potential sales price that investors could offer for a sample property based on their desired returns, factoring in different financing assumptions:
Financing Assumptions:
Bank Loan: DCR of 1.20, 4.75% interest rate, 20-year amortization.
Agency Loan: DCR of 1.30, 3.85% interest rate, 30-year amortization.
Summary:
To achieve the highest possible valuation for your property, it must be stabilized, particularly to secure the most favorable financing terms. Stabilization for an agency lender typically entails the property maintaining 90% physical occupancy and 85% economic occupancy for 90 days before closing. In the grand scheme of things, it all circles back to operations and property performance. Exceptional operations not only benefit you during the holding period but also significantly enhance your property's value when the time comes to sell.