So I found a 4 plex that's for sale of market it is a bit of a puzzle. I'm trying to figure out what it's worth. It's in a stable area, tried to get comps pulled but no other 4 plex's in the area have sold on market since 2006. I checked the tax records and it has sold 3 times in 4 years. It has a lot of deferred maintenance, they want 220k for it. But I'm not even sure if that's a good price. Any help or tips would be appreciated
Oh sorry the rents are under market they are collecting $2500 a month but rental comps should put it at 3200.
I tend to use the same cap rate for all sizes of property in an area. Properties of all sizes are competing for my investment dollar. I have no idea what that number is in your area.
I suspect that the under rent situation has something to do with the large amount of deferred maintenance. If we assume an 8% cap and 50% expense ratio then $2,500 a month would equate to $187,500. $3,200 per month would equate to $240,000.
You would want to know if the cost of rehab is less than the additional rent. By the way, I don't want to pay more than 1/2 the value of raising the rent. For instance, if the rent amount is not because of deferred maintenance, I would only want to pay $187,500 + 1/2($240,000-$187,500) or $213,750.
I hope you can follow my logic and plug in your own numbers.
@James L. Hi James,
It depends on value from which lenses that you're looking at the property from. I would be most concerned with value from the appraisers point of view personally because that determines the structure of your financing.
With smaller 1-4 unit residential you'll most likely be weighing your value based on comparable approach but if its not present an appraiser would look for GRM or gross rent multipliers.
A GRM of 100 means the property is selling for 100 times the monthly gross rental income or 1% rule as seen prominently on BP (gross monthly rents are 1% of the sales price).
An appraiser would go out to find duplexes, fourplexes, and triplexes, and sometimes non owner SFR's that are renting currently in the market and that have sold recently. The appraiser would adjust according for the monthly rental amount based on features, amenties, condition, location, and proximity to determine market rent and apply the most resonable GRM to your gross monthly rent.
So for instance if your market gross rents are determined to be $3000 (750 per unit X 4) and the GRM was 75X then your 3000 would be multiplied by 75 to end up with a market value of $$225,000.
Cap rates are great but no residential appraiser uses CAP rate, you can however use it for your "own," analysis to determine your ROI criteria but it has no bearing till you enter 5+ multi family, commercial, retail, and business financing.
So here's an update. To make it weirder, my agent was able to dig up some dirt. The current owner bought it cash off market in 2/13 then out it back on the market in 5/13 for 230k then off market then back on market for 280k. Then off market than on market 219k. Than it went off market and he got a 150k mortgage on it.all in 14 months. Then back on the market for the past 4 months.The previous only owned it for a year before that. It has super long term tenants been there for 10 years. I know I should run but kind of intrigued. Any thoughts?
@Albert Bui - I don't know how you learned about GRM, but you got it wrong because ANNUAL rent is normally used to derive GRM.
@Steve Babiak sure you can use annual if you'd like the only difference is a factor of 12 so you can easily differentiate which method a person is using with their GRM calculation.
The reason I use monthly is I am concern with monthly gross income multiple/multiplier annual is such a long projection. It's just semantics.
Plus when you see a GRM around 50-200 it's definitely monthly because annual GRM's around in the single digits to low twenties usually deending in area.
Plus on residential appraisals for properties appraisers use monthly GRM too but like i mentioned above I have my own reasons I use monthly.
How do you know what factor to use? Is it like cap rate which is derived from the local market or something you shoot for .
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