Multifamily Business Model - Part 2

Now that you know what a Cap Rate is, and how a Multifamily Asset is valued (if you haven't read the Part 1, you can find it here)

Now that you have acquired a property at 5% Cap Rate or simply 5 Cap. You will take over operations and assuming you will go ahead with 3% increase in rents.

Now your 100 unit property which was rented at 1000/unit, will now have new rents at 1030/unit because of the 3% annual rental increase.

This translate to an annual income of (100 x 1030 x 12) = 1,030,000. Which is clearly a 30,000 increase in the Operating income. Lets say if you have managed to keep incremental expenses to just 5,000 then we will have a total of 525,000 Net Operating Income.

Operating income at the acquisition = 1,000,000

Income due to Rental Increase @3% = 30,000

Total Operating Income = 1,030,000

50% Operating Expense = 505,000

Net Operating Income = 525,000

If we now apply the same 5% Cap rate the property is valued at (525000/0.05) = 10,500,000. Which is an increase of 500K in one year.

This is the basic business model of multifamily investments.

In the next blog we can learn about the benefits of Leverage and how it can accelerate your returns by taking a loan.

To your legacy.