Multifamily Pricing in Dallas

I learned the importance of tracking data, and as Bob Knakal often says, "Real Estate is an information business." When you start, it may be a extra work to build out a system, but it pays off dividends in the long run.

As this was my first experience in commercial real estate other than property management, I got to see my underwriting skills develop as I saw a ton of deal volume.

I was taught to use the T3 income/T12 expenses (adjusted for taxes and insurance) as a good metric for going in cap rate. Using the T3 income is helpful as you're able to use the most recent income and account for any rental growth, but not be overly aggressive in using the T1. T12 expenses are best as a lot of expenses are not recurring, and some expenses can be seasonal (ex. more AC repairs in the summer). Adjusting for taxes and insurance is vital because if you bought the property right now your taxes would most likely be adjusted to a higher basis (especially in TX), and insurance prices skyrocketing have been something to account for in the sunbelt.

Here's the average of where I've been seeing deals trade in the Dallas-Ft. Worth market and surrounding area.

Class A -16 Deals

• Cap Rate Variance: 2.89% to 5.41%
• Vintage: 2000-2023

Class B - 26 Deals

• Cap Rate Variance: 3.99% to 5.61%

• Vintage: 1981-2010

Class C - 14 Deals

• Cap Rate Variance: 2.41% to 6.17%

• Vintage: 1958-1985

Takeaway

I learned the most about Class C pricing from the data. A handful of these deals were poorly priced. Often, the pricing guidance would be based off a proforma NOI, when the property would be distressed. Ex. Rents were 30% under market and the property is 70% leased, however it was priced as if the rents were at market and a stabilized occupancy. I did not noticed much opportunity in this space, as the upside in the deal was typically priced in. Also, you can notice this in the average cap rate as there is not much spread in pricing between class B and C.