Valuing (and value adding) small multi in overpriced areas (San Diego)

[Jeff Thompson]

Hi all,

I'm early in the "figure out where we are going" phase and will do a ton more research before doing anything, so my question isn't if this is a good idea for a newbie, the question is: How do I value a small multi-family deal in a "overpriced" area like San Diego and determine the ARV if I'm going to try to make money by forced appreciation? (cuz haha cashflow around here unless you have a huge pile of cash).

Just to have something specific to talk about here's a property: https://redf.in/DxEDC2 - 4-plex of 3/1.5 units listed at $2m and actual NOI of $74k which puts it at a 3.7% cap rate. Projections (rents are under-market and the owner is living in one unit) list a NOI of $126.6k which is a 6.33% cap rate at the list price. The projected numbers listed actually seem rather fair at $2,950 rents where market rates are more like $4,000 if the place was updated.

How should I determine a fair valuation of this place?

Then lets say we rehab the building and get it stabilized at $4,000 rents which is let's say a $170k NOI. What is the value of the place now?

Now lets say run the units as MTR and average $5,000 per month for something like $200k NOI. Did I further increase the value on the property?

Thanks,

Jeff

[Dan H.]

Quote from @Jeff Thompson:

@Dan H. You're close, but I believe you selected the Kelly St. property, I was looking at the Tait St. one around the corner which is 3/1.5 and has more reasonable projected numbers. (The Kelly St one could be more appealing as there is plenty of room to add 2 ADU's however). Thanks for the headsup on SD rent control, that's more of an issue than I was thinking.

But you guys confirmed what I was seeing and thinking: it's the comps that determine value on these rather than the financials. The numbers approach appeals to me vs the "black art" of valuation, but I guess I need to become best buddies with an agent with extensive multi-unit experience anyways if this is the course I want to pursue. Is there a certain unit count that financials become dominant or is it area specific? 

I was thinking maybe it's something like land value + financials where if we're talking someplace like Ohio the land is somewhat negligible even on a small multi, but obviously in SD is highly valuable so much more of a factor. 

Going in lowish down and house hacking a local 4plex has a lot of appeal as our "getting started" first multi, but traveling a bit to buy something that doesn't bleed cash (Victorville area maybe?) would probably be a better place to start.

Thanks, 

Jeff

One more thing, you add an ADU to a quad and it now is commercial MF (more than 4 units) and should be valued based on NOI.

You may know this but commercial MF families have been more impacted by the rate increase than non-commercial MF nationally. It means that 5 units are getting valuations close to 4 units in many markets (but I have seen 4 units impacted more than 3 units, and 3 units more impacted than duplexes, and duplexes more impacted than SFH in the local market). If the rates do not increase further, the commercial MF (and their shorter term loans) can be a better value than non-commercial MF (assuming the commercial MF value does not fall further).

Good luck