Quad to 6-plex: repositioning valuation

[Mark Doty]

I have a hypothetical question for the community about purchasing a 4-plex that has been zoned for 2 additional units.This is a hypothetical exercise to identify gaps and valuations not currently under consideration.Feedback is appreciated!

The existing quad is listed for sale at $1.1M and a 5.3% CAP.Commercial multifamily in the area sells at a CAP rate of roughly 4.5%.The existing property is zoned to allow for 6 units and has available land to build an addition duplex for ~$150 per sqft.Assume 1000 sqft duplex at $150,000 and we'll build that into the loan.After expenses, the additional units will each increase the annual NOI by $14,400 = (Gross rent – operating expenses = $600x12x2).

Purchase Price  $1.1MM

Construction:  $150K

Loan amount: $1MM

Total for project:  $1.25MM

20% down: $250K

Pre-construction NOI: $58,300

Post construction NOI: $72,700

What is the estimated property value after construction?

• A.$1,615,555 = The post construction property value is $72,700 (NOI) / .0045 (Comp CAP Rate 4.5%)
• B.$1,371,698 = Post construction = NOI $72,700 / purchased CAP rate of 5.3%
• C.None of the above, but please explain

[Dan H.]

4 units and less are supposed to have value primarily based on comps.  

More than 4 units the value should be primary function of cap rate and NOI.

So in your hypothetical example current cap rate should not be used to establish the value on the quad. The value should be based on comps. After adding units the price should be established based on NOI and cap rate but it needs time to establish the NOI.

Good luck.