Hey BP Members -
I am looking at tax parcel 1 and tax parcel 2 which are on the same acre of land. It’s two triplexes, each consisting of (3) 2x1’s. They are listed for $480k and $485k. I'm wondering if I can increase the value of the property by making two changes:
1. Remove the "boundary line" and ask the city to consider the acre one tax parcel with 6 units; i.e. commercial
2. Increase rents to market, thereby increasing the NOI, and driving the value of the property much higher due to the difference in how residential 2-4 unit properties are valued versus commercial 5+
Proforma markt rent is $1250 per unit x 6 = $7500/mo or 90k annually minus expenses of $25,550 annually = $64,450 in NOI. Assuming the listed CAP rate of 4.4, the property is now valued at $1,464,772. Even if I paid full price, the appreciate is incredible and I have 30 year conventional loans in place...
Where is the flaw in my thinking? Current NOI is only $43,390.
Thank you for your input.
I am not sure I quite understand why you would be doing it. If you own both properties and they are co-located, I don't know why you would need to remove the "boundary line" to increase rents to market or get a higher valuation. You should be able to do both even though they are technically on different parcels as long as they are together. You can list the property as one package and just let the buyers know they are on adjoining parcels. If anything, removing the boundary line may reduce the flexibility the new owner would have (i.e. sell them off in smaller pieces). Just my thoughts.
I think this is a fun exercise, and it sounds like the conversion could be worth it. That said, I think you're operating under a few big assumptions here. None of them are necessarily wrong, but they are important to consider:
- The big one for me is you are assuming that the market cap rate is 4.4% for this property. I would double check that just in case because it's on the lower end. It's clearly a nice property in a nice area if you can get $1,250/month for each unit, but 4.4 is low.
- I would double check the $1,250/month rental rate, as well. Most markets probably won't support that type of rent to live in one unit of a triplex, but it sounds like yours might. Still, I'd do some more research on that.
- The expenses are pretty low, especially if you're converting to a commercial property. Most commercial buyers aren't going to trust your 28% expense ratio and will run their own numbers at closer to 50%. I would run the numbers at a 40% expense ratio and see how they shake out, because that is a little more realistic and would be something a typical buyer would accept.
I don't think it's a bad idea, especially at the numbers you gave. It can be a great way to pull some extra value out of a property, but I'd be cautious. Make sure your cap rate, rents, and expenses are all actually correct/make sense.
Great considerations Luke and Paul. Thank you. More number crunching yet to do.
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