How do I figure out a value?

Question

I am looking at a 6-plex and I am trying to figure out what kind of offer I should make. I am also trying to figure out what the ARV will be. I have several comps with in 2 miles in the last year but this is the first I have done anything with multi-family. Everything that I have looked into before has been SFH. What is the best way to determine the value of this Multi?

David Lee · Answer

Michael Seeker

congrats on the 500th post. The property has 2 of the apartments rented out but the other 4 are going to need work. I figured I would have to do a hard money loan to repair it and then refinance it after. What do you think?

David Lee · Answer

Michael Seeker This would be for buy and hold

purposes.

@Chris Wyche

I am not familiar with net operating income and cap rates?

Jeff Greenberg · Answer

The local CRE brokers should be able to provide you with Cap rates in the different sub markets and property class.  If they don't have the info then you may be talking to the wrong broker.

George Flanigan · Answer

I would not say that comps are irrelevant in commercial property valuation. The income method will be heavily scrutinized (with good reason). The price you bid for the asset should be weighted between two methods at the least and perhaps a third (such as replacement cost) to come up with a valuation. For instance, you would weight the income method 60%, comps 20% and so on based on your interpretation of the market You should be able to do this without the assistance of an appraiser, at least in the initial evaluation stage

shoul

J Scott · Answer

Start here:

Introduction to Real Estate Investment Analysis

Clint Dorris · Answer

Regarding comps and cash flow.  Everyone above has stated solid information.  But, it's important to remember that cap rates don't come out of thin air.  I'm a residential appraiser, but it should be noted that cap rates come from the market.  In other words, cap rates come from the numbers of other similar properties aka comps.  So while a cash flow analysis will be performed on a commercial property, those rates and figures should be derived from the comps, or at least of database of similar properties.

Also, it's great to say that the numbers work, so the deal works for your model.  But, what if good investors in that area are buying properties for $50,000 less than "your numbers" that work?   I think that is important to know.

Rob Fegan · Answer

@David Lee when I started out a good book that covers the topic of commercial / multi family properties was Real Estate H2O by John Dessauer http://www.amazon.com/Real-Estate-H2O-John-Dessauer/dp/141969927X

It is worth a read (took me about 4 hours to read through the book and I got tons of great info.  I would recommend reading it.

Rob

Will Barnard · Answer

Yes, the higher the cap rate, the higher the return and the lower the offer.

Getting back to the numbers example given, the NOI is way to high because the expense ratio is way too low. There is no multi in the country that can operate on a 15% expense ratio.

George P. · Answer

so let's say he uses 10% cap to get to 367k... he should make a lower offer, which esentially means he is dividing by a higher cap rate?

Chris Winterhalter · Answer

While many banks will value 5+ units based on the income approach most banks will still look at comparable sales in the area as well on a 6 unit building.  It really depends on the bank.  I'm not sure of the expected loan value however lending appetites for smaller multi-families 5+ are much smaller than larger complexes.  Especially when dollar amounts are <500k.  When you go below 250k appetites drop even more.  While I agree that you should buy on the cash flow of the building since this is inline with your strategy I don't agree that you should disregard value.  Proper valuation will be extremely important for multiple reasons.  If you are seeking end financing on the property you need to properly estimate your ARV. If you don't you could end up bringing more cash out of pocket than you expected.  I would connect with local bankers actually making these types of loans in the marketplace.  Get their opinion of ARV and discuss with them how their appraisers are valuing these types of assets.  Ask them at what cap rate they generally value the area and property type.  Also ask them about seasoning periods, loan to costs (LTC), and loan to value (LTV) requirements.  Also connect with a local appraiser for input as well.

Lastly be careful of your rehab costs.  Building code changes for buildings over a certain number of units.  I.e. fire, life, safety requirements etc.

Good luck!