Currently evaluating several offerings in East Central Illinois. Current offerings calculate out to a little over 3% appreciation per year since 1999. Each have 2 and 3 bedroom mix, near universities, C+ (ish) type properties competing against large scale, A+ type properties, reduced enrollment, possible saturation, etc.
Its a 29 Unit Multi-family in two buildings, 5/24 adjacent to one another with price of $870,000.
I own a 12 Unit ($305,000) and currently looking to finance a 14 Unit (rehabbed, more sq ft/unit) at $485,000 (with office/bath, and coin op laundry room).
The 3% appreciated offering seems a bit high for the area and I have been using 2% (max) for my own and the 14 Unit.
Am I wrong to use 2 percent? Is 3% justified?
Any insight beyond my own limited scope would be enlightening.
Jason, I'm confused. Are you basing the value of these units on a % increase of appreciation since a given date?
I am looking at the appreciation segment in relation to the listed sale price. If I exclude the going market rate, whether by sq ft or # bedrooms, the appreciation factor doesn't make sense to me, as a factor involved in the valuation. It is off what I consider to be usable, at this point.
I haven't looked into this portion of the investment until recently. My rate is based on comparable sales over time; recent sale-purchase.
Valuation of this property based on cap rates, price per unit, NOI, comparables, etc, doesn't seem to make sense. After studying the numbers, over and over, I get a gut feeling its value is $696,000 up to $720,000.
I don't see how making an offer at these numbers versus the list price can possibly be well received. I prefer to prevent making an *** out of my self by low-balling the property, even if the numbers seem to support it.
Maybe I just need to ditch the 'appreciation' factor altogether.
@Jason Cobb anything over 5 units is valued on the income, so local market appreciation has no bearing on the value of your property
It's cool how you are looking at the problem and trying to quantify it in different ways. However as @Brie Schmidt said anything over 5 units is based on income. There are three approaches to value with real estate. They are economic, comparables, and replacement value.
With an underlying asset such as apartments you would give the most weight to the economic approach (cap rate derived value).
Almost any commercial appraiser looking at your property would no doubt assign at least 90% of the total value to the economic approach. What comes next is the "art" component of appraisal. Some appraisers may decide to make that 95% or keep it at 90% and average the replacement costs and comparables for the other 5-10%.
Trying to disentangle the financials the way you are doing is very fascinating but will not give you a number that can be justified by folks in this industry.
Good luck with it!
Fully understand the normal valuation, however, their number appears to have come from 29 units at $30,000 per unit; $870,000.
Trailing twelve financials show the cap rate comes to 5.47
For this type, age building, location, size of apts, it just doesn't make sense.
Hey @Jason Cobb
Good work on acquiring the multi-family. One of the things that would concern me is the statement
"Each have 2 and 3 bedroom mix, near universities, C+ (ish) type properties competing against large scale, A+ type properties, reduced enrollment, possible saturation, etc."
How are you going to balance out all of the negatives which you listed for the rental market? Are you just ensuring you offer a better product at a lower price? Is there any room for you to force appreciation in the current market conditions if you are having to lower rent to stay competitive and keep your vacancies down?
Champaign/Urbana is seeing similar trend in more and more units coming online in 2015 and 2016 but that is in the A-class student rentals so I try to stay out of that ultra-competitive class.
Best of Luck
Right now the trend is the incoming freshmen seem to flock to the class A properties, within two years they are moving to smaller rental units. They seem to realize the costs are eating them up and they look for the smaller apartments which costs less to live in, and are still very nice and close to campus. A recent rumor was that the Class A properties can only max out at 65% to 85% capacity each year. The SFR's which 5 to 8 students share are going vacant year after year. The students just don't want the hassle. I have no problem getting year round contracts with older students, working adults, and especially grad students who know how to manage money and understand the value of reducing debt projections for coming out of college.
Would love to expand in this niche, just don't have the down payments....
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