Determining value of multifamily property

12 Replies

Hey, everyone.
I've been thinking of purchasing my first investment property nearby, in the town of Holly Hill.

The property has great cashflow, and all seperate meters. Its a triplex that brings in about 2,400 a month. They are selling it around 190,000 in good condition. They are willing to owner finance with terms that rival what banks are offering, but without the closing costs. (The reason is that the seller is old and wants to start selling off his properties and holding notes)

The problem is, I can't find any good comps to compare it to within a couple miles. I also can't find any properties that were producing as much income when they were sold. Unfortunately, not one multifamily between 2 and 4 units has sold for as much as this property in the last year (atleast on the MLS), which makes me nervous.

Truthfully the price is very high for the area, in general and especially based on square footage. But the cashflow is also very solid.

What is everyones thoughts? I think the cashflow totally justifies the price, but at the same time I'm very nervous that the price is very high for the area, and it may be hard to sell for what I'd be paying for it down the line.

I know a lot of people don't care about comps, and valuate properties based on cashflow, but I know a lot of people also rely on comps.

Bascially, short and sweet, based on cashflow the property beats pretty much everything on the market in that price range, but the property costs more than pretty much anything sold within 2 miles in the last year, and is priced very high per square foot. It is an extremely hot market.

Would you purchase a deal like this?

@Ryan Magnano I have the same issue pulling comps on duplexes I'm finding for a few clients. The cash flow and expenses are easy to find and work with, but I'm having to go to a large radius and back a full year to even find 5 remotely similar properties and often have to use judgement that they are in a similar area. In all honesty, you have to work with the information you have. My suggestion would be to pay for an appraisal (less than $500) and go from there. Since it is owner finance, you don't HAVE to go with appraisal. But if it comes in at $165k it would be a negotiation tool, even if he'd only meet you halfway.
And in regards to $2400 gross monthly rent on $190k purchase, those look like promising numbers as long as there are no oddball huge expenses like taxes or insurance. In my area I'm finding most duplexes rent a bit below 1% as they are overpriced, with the occasional properties priced right to rent a bit over 1% (for example, one on the market now could get $1900 gross rents and is listed at $165k with new roof, ac, pipes, windows, etc). 2/2 rent is about $900-1050/mo and most duplexes are over $200k. On that alone I wouldn't write it off as too expensive until further due diligence (rent roll, expenses, repairs needed, etc).
 @Russell Holmes :


I really appreciate the response, Russell.

In regards to the appraisal, I recently tried to purchase a property with an FHA loan, and the appraisal came in 25,000 below the purchase price. I personally felt the price was a deal and a half, the cashflow looked great, and the price was very low compared to both single family homes in the area, and multifamilies. Now call me crazy, but I feel that appraisals are currently not coming in indicative of what people are willing to pay in our market, especially for multifamilies. I honestly expect that if I were to get an appraisal pulled right now, it would almost certainly come in extremely low. Am I wrong here?

The seller claims that he has an offer already, and we identified exactly what my offer would have to be in order for him to accept. I will of course put that my offer will be contingent upon him proving he has another offer for just less, but at this point its looking like theres not much room for negotiation, and that if I don't feel comfortable with the price, I should walk.

Obviously I'll feel a little better if I know someone else is offering close to my offer, but at the same time I want to know that I am making this purchase on solid ground.

4 units or less are valued based on comps. That's why the seller wants to carry the note. He does not want to let it go based on the comps. You should only pay what the comps are. If this was a commercial Apartment complex 5 units or more, then the sale price would be primarily based on the NOI.

Not a good deal for you. Great deal for the seller if you fall for it.

Swanny

Don't forget to figure in the cost of water/sewer.  That is usually not able to be metered separately and can be quite high in some cities (have a duplex in Cleveland and it's almost $2k a year for water)

hmmm.  To me, if you are making $ at it... and the cash flow is accurate vs ALL expenses... then go!  Appraisals and comps on mf are BS, as you are finding out.  If there are NO good comps... what is the appraiser gonna use...?  Old ones, that dont work, and undervalue the property.  let alone that most lenders will only do 75% on a 4 plex... in my experience so far.  Let alone seller finance, where this wont show on your credit....  PLus you are getting it done for just title fees... no closing costs... so you can take that off your initial cost too...

I really appreciate everyones different perspectives. I know this is a topic that very few of us agree on.

I've decided to move forward with the agreed upon terms, but I added an appraisal contingency (even though I don't think they're accurate in hot markets)
I figure if it comes in low enough to confirm my fears I can walk, but if it comes in reasonably low, as I expect, it'll give me a good way to talk the seller down a little more.

I am really surprised the seller agreed to an appraisal contingency, when the comps are much lower.  Let us know how this works out for you.

Swanny

If you're gonna hold it forever and it cash flows at a return you're happy with, who cares? 

Of course the flip side is that if you ever sell, you're hurting yourself then.

I think he agreed because he knows I'm serious, and because I truthfully believe he hasn't looked at the comps. Me and the seller have known each other a while.

I can understand why he wants to sell it for so much. If I were him, I wouldn't want to give up that cash flow for much less.

And Dustin, I agree, but at the same time I would never feel comfortable buying something I couldn't sell, even if I hoped to hold it forever. I think an exit plan is very important

I completely get where @Michael Swan is coming from...and anyone who hasn't listened to his podcast should. That being said, small multis that exist places like this without hardly any comps are interesting to me. There are likely lots of nearly identical "comps" that simply haven't sold in years. I've had my eye on a few clusters of newer duplexes around me for several years and none of them have sold but all stay rented. I know that literally value is based on comps. However, I would imagine that cash flow , even on a duplex, is one of the top priorities for an investor buyer. Even though cap rates don't apply, the concept has to come into play. Like you said @Ryan Magnano the sale price has to justify giving up the cash flow for the seller. That's not the same as commercial cap rate values, but it's in the ballpark when it comes to value to seller and buyer.