How to value multifamily homes (Lakewood, CO)

11 Replies

We are looking to move to Lakewood, CO from Chicago. We are thinking about starting our investment journey living in a duplex, triplex, or 4-plex. I'm confused if I should be researching the recent comps like I would a SFH or paying more attention to what's for sale and looking at occupancy, rental rates, and cap rates?

For 2, 3, and 4 unit properties I typically focus on sales comps first and then back that up with my investment criteria and the returns I'd want to make. You'll want to know what the market rents are, all your expenses, and where your demand is coming from; but cap rates at properties that small typically can be tough to compare and buyers at those price points typically don't put much weight on that metric from what I've seen. 

I agree with David. Additionally, Appraisers will likely look at both the income and sales approaches to value but more reliance will be placed on the sales approach for an asset of this size. I would analyze based on you not living there to see if meets your cash flow requirements. I'm assuming you want to house hack for a while, obtain the more favorable owner occupied residential financing, and eventually move out and keep this as a cash flowing rental?

I would look at sales to see if it's priced reasonably and then analyze the income to see if it makes sense for your personal situation.

Touch base with local REIA, and try to get in touch with a local real estate broker. Put the broker to work before you get there. Also post some test CL ads for the rental units and area you are researching. This will give you a quick idea on health of rental market in that particular neighborhood.

@Elizabeth B. The 50% rule is just a general rule to give you a ball park of how much income the property should generate after expenses, but before any debt payments are made. 

Effectively, you'll have your gross income, minus vacancy, which will give you your effective gross income. 

From there some investors, to gauge their net operating income, will subtract 50% to account for operating expenses. It is really just used to run a quick calculation but in some cases can be fairly accurate depending on a number of factors with how the lease is structured, who will be managing the property, etc.

The 50% accounts for taxes, utilities, insurance, maintenance and repairs, management, any marketing and admin costs to operate, etc. Anything that is imperative to the continued operation of the property will be included in this figure. One off items will be considered capital expenditures and are considered non-recurring costs to continue operating the property. Capex may include a one time plumbing fix, roof replacement, etc.

Hope this helps!

Bit late to this discussion @Elizabeth B. , but you're not likely to be able to make the 50% rule work in Denver/Lakewood these days I'm sorry to say (You could back in 2010). It's difficult to find properties with good cash flow. Your idea of an owner occupied multi is a great one though, as it allows you to buy in our crazy market and have the additional income. You may be able to get enough rent on half a duplex to cover the mortgage - if so, that's doing well. And considering what you'd pay for rent, that counts as money back in your pocket IMO.

I do a lot of hunting for good owner occupied multis for clients- let me know if you want to talk about the type of stuff that's available. When are you moving to CO, and why?

@Jean Bolger  We are actually from CO and moved away for a job promotion...IN MINNESOTA.  Why, oh why did we ever do that???  Anyway, we are in the Chicago suburbs now and are hoping to return to CO (Lakewood)  in the next year or so.  I'm doing market research now to get a feel for what we can expect to pay and need to save for a MFH.

I'm sure you'll be glad to get back- even with the spike in house prices. 

I don't see a ton of 3-4 units in Lakewood, but there are a number of duplexes. Of course the best scenario is a "real" duplex (zoning, separate utilities, etc) and there 's a reasonable supply of those (although they aren't as common as in the midwest, as you've probably noticed). There are a number of houses that have mother-in -law apartments, or, as they are charmingly called in the Chicago area, "granny flats" and those can sometimes be a good buy for someone looking to get  additional rent income on an owner occupied. I see plenty of decent options go buy in the 300-450k range. Anything below that is probably going to need a lot of work

2-4 units are appraised based on sales comparisons, but you still need to ensure you understand area rents, cap rates and cashflow as you evaluate deals. 5+ units are appraised based on income. 

@Elizabeth B. Since you stated you're pretty new to this, take a look at the Ultimate Beginner's Guide and other resources on BP -

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