A
Specialized Segment of the Multifamily Investment Market
Apartment buildings containing approximately 25–50 units
occupy an interesting position in the Los Angeles multifamily market.
They are considerably larger and more complex than small
apartment properties, yet many remain accessible to private investors, family
offices, partnerships and regional multifamily operators rather than
exclusively institutional investors.
KN Commercial focuses on this segment of the West Los
Angeles multifamily market, providing brokerage, valuation and disposition
advisory services to apartment building owners and investors.
Why Focus
on 25–50 Unit Properties?
A 25–50 unit apartment building requires a different
analysis than a duplex, fourplex or small apartment property.
At this size, buyers tend to focus heavily on the property's
financial performance.
Important considerations include:
Net Operating Income (NOI)
Capitalization Rate
Gross Rent Multiplier (GRM)
Debt-Service Coverage Ratio (DSCR)
Price Per Unit
Price Per Square Foot
Current vs. Market Rents
Operating Expenses
Vacancy
Deferred Maintenance
The interaction between these factors ultimately influences
what sophisticated investors are willing and able to pay.
NOI Is
the Foundation
Net Operating Income is one of the most important numbers in
determining multifamily investment value.
For example, assume a 35-unit West Los Angeles apartment
building generates:
Gross Scheduled Income: $1,000,000
After vacancy and operating expenses, assume the property
produces:
NOI: $550,000
At different capitalization rates, the indicated values
would be approximately:
4.50% Cap Rate — $12.22 million
4.75% Cap Rate — $11.58 million
5.00% Cap Rate — $11.00 million
5.25% Cap Rate — $10.48 million
A relatively small change in the capitalization rate can
therefore create a substantial difference in indicated property value.
However, the calculation is only the beginning of the
analysis.
Current
Income vs. Future Potential
An investor purchasing a 30-, 40- or 50-unit apartment
building is purchasing both existing cash flow and the potential future income
stream.
This makes the rent roll particularly important.
A property with significant loss-to-lease may provide
long-term upside but might not initially support the same financing as a
building already generating stronger income.
Investors therefore evaluate not only:
“What could the building eventually earn?”
but also:
“What does the building earn today?”
Both questions can affect pricing.
DSCR and
the Buyer's Ability to Finance the Acquisition
Debt-Service Coverage Ratio has become increasingly
important when evaluating multifamily acquisitions.
DSCR compares a property's NOI with the annual debt payments
required to finance the property.
For example:
DSCR = NOI ÷ Annual Debt Service
If a lender requires a minimum DSCR of 1.25, the property
needs to generate $1.25 in NOI for every $1.00 of annual debt service.
A property may appear attractive based on a seller's asking
price, but if its existing NOI cannot support sufficient financing, the buyer
may need substantially more equity.
That can reduce the investor's return and ultimately affect
what the investor is willing to pay.
For this reason, KN Commercial believes financing should be
considered during the valuation process—not after a property has already been
priced.
Price Per
Unit Can Be Misleading
Owners often hear that another apartment building sold for a
particular price per unit.
While price per unit is useful as a comparison, it should
not be used in isolation.
Consider two 30-unit buildings.
One property may have renovated units, strong rents, ample
parking and limited deferred maintenance.
Another 30-unit property may have substantially below-market
rents and require significant capital improvements.
Both contain 30 units, but they are not economically
equivalent investments.
The same principle applies to price per square foot and GRM.
Each metric provides another piece of information. None
should replace a complete property analysis.
Los
Angeles Rent Control Considerations
Rent regulations can materially affect the investment
analysis of an apartment property.
Buyers evaluating Los Angeles multifamily properties may
consider current tenant rents, allowable increases, vacancy history, tenant
turnover, renovation requirements and the time required to realize potential
rental upside.
A building with significant rent upside can be attractive,
but sophisticated investors generally assign value based on what can reasonably
be achieved rather than simply assuming every unit can immediately reach a
projected market rent.
Who Buys
25–50 Unit Apartment Buildings?
Potential buyers can include:
Private multifamily investors
Family offices
Local and regional apartment operators
Real estate partnerships
Syndicators
1031 exchange buyers
Private investment groups
And, depending upon property size and value, certain
institutional investors.
Identifying the right buyer pool is therefore an important
part of positioning a property for sale.
Off-Market
vs. Broad Market Exposure
Some 25–50 unit owners prefer to initially test the market
privately.
An off-market approach may allow an owner to evaluate
serious interest without immediately exposing the property publicly.
For other properties, broader market exposure may generate
additional competition and potentially stronger pricing.
Neither strategy is automatically right for every owner.
The decision should be based upon the property's
characteristics, the depth of the likely buyer pool, the owner's timeline and
the owner's objectives.
A Focused
West Los Angeles Multifamily Approach
KN Commercial concentrates on West Los Angeles apartment
investment properties, particularly within:
Palms • Culver City • West Los Angeles • Mar Vista •
Venice • Santa Monica • Westwood • Brentwood • Beverly Hills
Rather than attempting to cover every commercial property
type throughout Southern California, our focus is on understanding the
multifamily investment market and the financial factors that drive apartment
building values.
Considering the Sale of a 25–50 Unit Apartment Building?
Even if a sale is not imminent, understanding current value
can help an owner make better long-term decisions.
KN Commercial can review the property's rent roll, income
and expenses, unit mix, location and other relevant characteristics to provide
an initial opinion of market positioning.
From there, an owner can determine whether it makes sense to
continue holding, improve operations, refinance, explore a confidential
off-market transaction or pursue a broader sale process.
Kevin Nielsen
Broker Associate
KN Commercial | Cavanaugh Realtors
California DRE #01355777
West Los Angeles Multifamily Investment Sales
Specializing in 25–50 Unit Apartment Properties