Paying above appraised value for SMF??

Question

Steve Vaughan · Answer

Here even with low insurance premiums and low property taxes, I need my multis at 1% to pencil. At $105k per unit, they'd have to rent for $1050 per month each.

What are the rents? What utilities do you pay for?  What do insurance and taxes look like in your area?

Brian Garrett · Answer

This is a 4plex so it’s valued strictly based on comps and not on income. I wouldn’t buy this deal unless I could find comps to support the price and even then I’d want to be buying below that number aka below market value so I can force appreciation.

Kera Covani · Answer

We are financing the deal and will have to pay the extra 35kupfront. All of the units can use an update to the kitchen and bath - which I have allotted 20k to do - adding value to the property, moving forward.

I have increased the vacancy, repairs and cap ex to 5%.

After all expenses paid, each unit will profit 350/month. Possibly more, depending on how high I can increase the rent. This complex does not offer any amenities and is just a small circle with several buildings. So larger apartment complexes, with a pool, etc would be my competition for rent ants.

My intent is to keep the property at least 5 yrs. This is a good area with good schools. I hope to purchase more buildings in the complex as they come up for sale.

With the above info, would any of you move forward with this deal?

Kera Covani · Answer

Thank you for all of the wisdom, advice, and suggestions!

Russell Brazil · Answer

Part of your decision here is whether you are paying cash or financing it.  If you are paying cash, then the appraisal isnt that big of a deal.  My market has very few multifamilies, so the appraisals on them are always going to be tricky, like yours was here.

However if you are financing it, then $35k extra to come up with in addition to your down payment and closing costs is significant.

Remember, an appraisal is one persons opinion of value. A different appraiser might come up with a completely different number. And when there is a lack of comparable sales, an appraisal just is not a good indicator of value, because they can only use comparable sales to come up with their number.

Clayton Mobley · Answer

@Kera Covani What are your vacancy and maintenance / capex figures based on? Those are low estimates, so just wanting to verify whether those 3% assumptions are based on actual historical data for this property or some estimate provided by a third party, your own baseline assumptions, etc. Esp for capex and maintenance, 3% could end up being low if this isn't a brand new property. How old are the big items? And remember, multis mean more of those than SFR - more kitchens, more bathrooms, more traffic on floors / often higher tenant turnover (not always of course) - just noting that capex can get away from you quickly if all big items aren't new or nearly new, so budgeting 3% may be low. You'll know the details better than I do, just some food for thought.

Best of luck!

Thomas S. · Answer

You should be paying based on rental income. You should be looking for properties with the ability to add value/paying below market.

What is the total rental income on the property. Cash flow is of little value as it is a arbitrary number, extremely subjective. Rental income is the number that sets the value.

Kera Covani · Answer

My plan is to hold onto it for several years. The cash flow is about 400/unit. There are other 3/2’ s in the complex. So, if I bought this one at this 420 - would it be a comp for others, thereby increasing the value of mine to at least purchase price then higher in years to come? Am I making sense?

Paying above appraised value for SMF??

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