Analyzing Small Multifamily Properties: Duplexes to Small Apartments

Multifamily properties produce income from several units at once, which can spread vacancy risk and make management more efficient. They also require more careful analysis than a single house.

How it differs from single-family

Single-family homes are usually valued based on comparable sales. Larger multifamily properties (typically five units and up) are often valued based on their income. Two- to four-unit buildings sit in between: residential lending, but investors still think in terms of income.

Step 1: build income unit by unit

List each unit with its current rent, lease end date, and estimated market rent. Add other income such as laundry, parking, or storage. Use actual collected rent, not just scheduled rent.

Step 2: get the expenses right

Include:

• Property taxes (and potential reassessment after purchase).
• Insurance.
• Utilities the owner pays (common on older buildings).
• Repairs and maintenance.
• Capital reserves.
• Management.
• Turnover costs.
• Landscaping, snow removal, trash.
• Legal and accounting.

Sellers often leave out management, reserves, or vacancy. Add them back.

Step 3: NOI and value

Net operating income equals income minus operating expenses (excluding loan payments). Value for income property is often NOI divided by the market cap rate. If NOI is $30,000 and similar buildings trade at an 8 percent cap rate, the implied value is about $375,000. Small changes in NOI or cap rate change value substantially.

Step 4: read the unit mix

Count bedrooms per unit and compare with local demand. In many Midwest cities, two- and three-bedroom units are in steady demand, including from voucher holders. Studios and one-bedrooms may have higher turnover.

Step 5: price the value-add

Value-add plans might include renovating units, separating utilities, adding laundry, or improving management. Estimate the cost, the realistic rent increase, and the time needed. Then consider the risk that rents do not rise as planned.

Documents to request

• Rent roll.
• Leases.
• Trailing twelve months of income and expenses.
• Utility bills.
• Tax bills.
• Service contracts.
• Capital expense history.
• Insurance claims history.

Tools

The S8 Atlas Deal Analysis tool lets you test multifamily listings with conservative assumptions, and AI Analyze can help summarize what to verify.