Determinig the value of Multi-family properties
I am looking at purchasing Multi-family properties where the numbers work, they cash flow just over $100 per unit, and meet the 2% rule, however for at least one of them, and for other in the future, I would like to utilize the BRRRR technique, which means it is very important that I know the approximate value the property will appraise for. I think I am good at using comparable sold properties, and a little bit of pending and for sale properties, for determining single and maybe 2-family/duplex properties, but for a 4-unit and 5-unit property, I not coming up with good data. I know the 5-unit property will need a commercial loan, and I may not use BRRRR there, but I still need to know the approximate value of the property.
Please share your guidance.
Thanks in advance.
@Christopher B. the 4 units will have to be evaluated using comps because that's what the appraiser will have to do if you go to refinance it using a conventional/FHA loan.
If you don't have enough comps, you can do one of 3 things:
1) extend the radius
2) look at singles/duplexes in the area and extrapolate based on price per unit where the more units you have in the property, the lower the price per door
3) Extend the period of time you're searching to a full year or even two years back.
The 5+ units are held to a commercial appraisal rules and it will be income based. I have created a short blog post about how to valuate a MF property (commercial). You can find it here: How to determine the value of a multifamily?
Hope this helps.
If you have specific questions, feel free to ask.
@Joseph Gozlan , thanks. So, for the 4-unit, what do you mean by your point #2. Are you saying look at a duplex, and double the price to somewhat draw a comp to a 4-unit? I was looking at the sq. ft. of duplexes, but those numbers are a little all over the place. This 4-unit is not much large than some of the duplexes. It's all 1bd/1ba units in the 4-unit.
Let's say you have no 4-plexes comps in the area but there are duplex comps:
1) 2000SF duplex #1 sold for $200,000 -> unit size: $1000SF
2) 4000SF duplex #2 sold for $300,000-> unit size: $2000SF
3) 1200SF duplex #3 sold for $150,000-> unit size: $600SF
let's assume to make things easier they are all the same grade of quality and they are all leased to tenants at market values.
Duplex #1 sold for $100 per SF and $100K per unit
Duplex #2 sold for $75 per SF and $150K per unit
Duplex #3 sold for $125 per SF and $75K per unit
Now you have numbers you can compare to your 4plex. I used round numbers to make it easier to spot but usually the larger the unit the lower the price per SF and the price per door.
If you have duplexes comps in the area that have similar unit size that rents for a similar price then you can use these comps.
For example, if your 4plex is 4000SF you can compare it to duplex #1 in unit size but because it's a larger building you can assume it'll go for $330K-$375K which is less than $400K (2 X $200K)
Hope this makes sense.
A word about market supply & demand: everything above is based on math and not emotion. Just because that's how my mathematical logic works doesn't mean the seller is logical or realistic. In a hot market where everyone wants to by a 4plex, a seller can request (and many times get) a lot more than his property really worth. In the above example, that 4plex could have been sold for $500K if there is no supply of properties in the sub-market and an over supply of stupid money (happens more times than you can imagine).
Thanks. So, the property I am looking at is 4 units, totaling 2,988 sq. ft. Below are Duplex Sold Comps I found very closely nearby, within about a 1 mile radius, mostly same neighborhood.
Based on the above, you would think the 4 unit should be valued just under $70,000, but there is that last comp, property #4, would when multiplying it's $ per sq.ft. by 2988, comes in at $97,498.
There is a 5-unit for sale, just over $100K, but it's been on the market for nearly two years. This one is near 90 days.
Your thoughts?
What about using cap rates here?
Originally posted by @James Free:
What about using cap rates here?
Negative ... as explained by another response, 4-plex is residential property. Residential property is valued via sold comps. Trying to value residential property as a commercial property via CAP rates can get you into all sorts of trouble ...
Originally posted by @Christopher B.:
Thanks. So, the property I am looking at is 4 units, totaling 2,988 sq. ft. Below are Duplex Sold Comps I found very closely nearby, within about a 1 mile radius, mostly same neighborhood.
Based on the above, you would think the 4 unit should be valued just under $70,000, but there is that last comp, property #4, would when multiplying it's $ per sq.ft. by 2988, comes in at $97,498.
There is a 5-unit for sale, just over $100K, but it's been on the market for nearly two years. This one is near 90 days.
Your thoughts?
The other response was good and will point you in the right direction ... my comment is Yikes! Look at the cost per sqft ... that is WAY below replacement cost, which is a red flag, not a green light. I've purchased property below replacement cost, but that was because I got a great deal compared to comps and/or because the market was seriously but temporarily distressed (2009). If in this day and age, in a great economy, the comps are all selling for 25% or less of replacement cost (a pro developer could not build them for that), that means you are looking in a VERY depressed RE market where prices are deflating well below inflation and you are likely taking on some serious risk IMO. If you hold this property long term, you will have CapEx and will eventually have to replace everything at replacement cost. Otherwise, what do you do if the roof goes bad and the value of the property is worth less than the cost of the roof job? Throw the property away? Well, I'm betting that's the answer many other landlords are coming up with which is why you see comps priced like this. And NO, cash flow will not somehow magically save you from the realities of a depressed and deflating RE market ... this is something you should seriously think about before buying in that neighborhood IMO ... I'm not an expert in your market, and I may be wrong, and I'm sure plenty of others may flame me for this response, but please seriously consider the red flags these numbers may be throwing out and determine for yourself if there is some truth to what I have said.
I'm appreciate the feedback and am not disagreeing but would like to better understand how replacement costs will come into the scenario. I see you are saying values are going in the wrong direction, and there may not be any appreciation. This is a gamble in regards to appreciation. Values are a little stagnant in this area. It's a working class area, not far from other prime parts of town, and rentals go quick when available. That prime area, about 1.5 miles away, has sold comps of smaller duplexes that are consistently just over $100K. There is a factory being built within a half mile to a mile, which should employ about 300 people, and the site is expecting to employ double that in the coming years, so I expect that should help. Cashflow would be about $400 if I can buy the property for what I want to buy it for. That cash flow is after PITI, Maintenance @ 5%, CapEx @ 5%, Vacancy @ 6%, Property Management at 10%, Gas, and Water. Rates are below market, so I would need to raise those also, to get to just over $400. Windows, furnace, and HWH have been replaced within the last few years. It's 12% cap rate, and 2.4% of the 2% rule.
So, the Seller, who is also the Listing Agent, strongly of course agreed with my assessment, when sharing the comps above. She responded stating the properties I shared were not of the same quality, frame vs brick building, updated windows, furnace, which I somewhat agree with. Still, brick structures of this size only exist with comps in the last 12 months, when they are located a mile west, which is closer to a more prime area (entertainment, shopping, restaurants). They are all around $100K, which is where this one is priced. Going back 24 months, I can locate at least 1 brick structure, in the neighborhood of the subject property, which sold @ $95K I don't want to buy at retail price, because I'm looking to have equity built-in, but the numbers work in terms of cash flow and the 2% rule, so I am thinking of offering $85K.
I would like to BRRRR out, but based on my calculations at this point, I would be leaving $19K of my Cash/Heloc in the deal. Gross Income will be $1900, after I raise rents by about $50 per unit. Cash flow will be around $400, or $100 per unit, after PITI, 10%PM, 5% CapEx, 5% Maintenance, and 6% Vacancy.
Yours thoughts?
As an appraiser, we would likely use both the Sales Comparison Approach (comps) and the Income Approach.
The SCA has been discussed in this thread by why not use the Income Approach. For a 2-4 family property or even a small multi-family up to 10 or 12 units, use a Gross Rent Multiplier.
Stay with a monthly multiplier to make the max easy. For example, If the sale price is $100,000 and the gross monthly rents are $2000 the gross rent multiplier (monthly) is 50.
As long as your sales are in the same neighborhood, have similar number of units, and the same utility payment structures (water, electric, heat, etc), this GRM approach from an income standpoint will give you a good range of values.
You should find that your comps have a fairly narrow range of GRMs and that differences in GRMs can be explained based upon differences between the properties like condition, location, bedroom count, etc.
Take the market GRMs and then compare to the market or contract rents for your subject property and this will give an Income Approach value.
Compare the Income Approach Value and the Sales comparison approach value based upon which Approach has better and more relevant data and then you have basically done an appraisal
Thanks @Eric Fegan. So, it appears GRM is around 60 for other duplexes in the area. For other duplexes with similar building structures to the subject property, all brick, the GRM is 75 - 83. The subject property at list price is 52, based on market rent, and 57 based on contracted rent. What does this mean though?
Christopher B.
Sorry for the delay. I haven't figured out how to follow discussions.
With the asking price being less than market GRMs then you likely have one or a combination of the following:
1. A difference in utilities paid between the subject and comps. If the subject pays more in utilities than the market comps then the subjects GRM would be lower due to more operating expenses eating up the gross income than the comparable properties
- check the utilities paid for other comparable properties.
2. The subject in inferior condition or cap ex needs compared to comps
Or
3. You have a good deal.
Use the GRM based Income Approach on single or small multi-family properties as a guide to reconcile with sales comps. The GRM approach ignores expenses but if all sales considered are the in the same neighborhood and are similar then the differences in expenses should be minimal.
Thanks Eric. I missed that the units needed to be the same. I'll search further for 4 units to match the subject property.
My one concern with this property is I will pay cash (HELOC on primary residence), and want to BRRRR out of it, with a 70% LTV cash-out refinance. However, based on my calculations, I'll be leaving about $19K in the deal. Thoughts?