How would a lender value a property generating 32k a month?

16 Replies

So here’s my situation.

I recently bought a hotel, and converted it to efficiency apartments. 

It has a common area, and a courtyard that is still being worked on. The rooms are finished and occupied. There are 43 rooms in total. It’s generating about $33,000 a month, $21,000 after all expenses. My plan is to use a big chunk of that to do more community development.

I’m also considering refinancing to pull more money out of the building. Have about 500k in it so far. Closed 3 months ago. How long do I need to own it and how would the bank value the building?

My goal is to get more long term housing options in my community. 

First of all, congrats. I've been reluctant to go down that path but it is definitely one of the hot redevelopment opportunities out there.

I'm not sure how seasoned this deal will need to be for a lender to put perm financing on there. I would imagine 12 months since usually it's based on 3 months of income and 12 months of expenses. Also, you say that expenses are $12k but they would normalize  it based on their criteria and it might be more than what you're seeing right now. Particularly on something like Repairs & Maintenance, you're probably showing nearly $0 because you just rehabbed it but they won't underwrite to zero R&M. Then I'm sure they will look at sales comps (if there are any) and figure out a market cap rate to use.

Just reach out to a lender and ask.

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@Hope Fick , congratulations and I respect your vision.

A commercial property like this is valued based on its NOI (Net Operating Income) divided by the market cap rate.

So $21,000 x 12 = $252,000 NOI

Assume the cap rate is 5 (could be more or less in your market), $252000/0.05 = $5,040,000

You should be able to get a 70%-75% LTC loan on this (minus any reserves and fees).

Hope that helps.

Thank you Percy, that does help!

I’m 1/3 owner of this project. I’m estimating over 3/4 of people with housing vouchers can’t find a landlord to take it, even excluding the ones that have other issues like criminal history. I can’t believe the government solution to housing is to give somebody a piece of paper, and probably nine out of 10 of those do not receive an actual place to live. It’s crazy to me.

Even the trailer park is full. There is no construction happening for this income group. We’re still considered a very affordable housing area, a new construction three bedroom two bath home will start at about $209,000.

The local nonprofit has been paying up to 30 days for people to live in a hotel just down the road, which is costing them approximately $78 per day. They’re spending a huge amount of money on super expensive housing. 

We were full 6 weeks after the local office approved this space. Everyday 3-5 vouchered people call me, needing somewhere to live. We could use many more just to meet current demand. 

@Hope Fick ..that's truly awesome and you've turned the property into what seems like a cash cow.  From a lender perspective, this still might be difficult to value though because of the quirkiness of the asset, even though it's 'multifamily,' per say.  I don't know if you found what you're looking for, but I'd be interested in hearing more.  PM if you can.  Thank you.

I am an investor out of Michigan and we actually own 3 converted motels. In my experience we only needed to show a current "rent roll". Now since you own the property you should be able to provide. This may be a dumb question but have you asked your local lender this question? OR send a local commercial appraiser the question and see what they would want to see. It will all depend on your local lender. I am happy to talk more about my experience with this type of asset class. Good luck my friend!

This is great - win/win/win for the residents, community, and you.  Be careful with zoning...multifamily use may not be permitted in commercial zoning (or may have to pursue re-zoning or zoning variances).

Thanks for the feedback. Kimberly - Talking to a commercial appraiser would be a great idea. I need to make that connection locally. It was because of my parents connection to the local bank this even happened. We started a LLC and are 1/3 owners. I don't want to rock the boat with the current lender at all, I know they are very conservative and probably would be blindsided if we tried to refinance soon. 

I'm a residential real estate agent by trade, I specialize in flip properties. This is a whole other world to be sure. I'm just happy it's going well, but also planning for the future.

Originally posted by @Hassan O. :

What’s the current zoning?

I think turning a hotel or motel to apartments in California is very difficult. I tried to turn an old motel into rooms for college students about 30 years ago, hired a real estate attorney, fought the city and could not win. Since the motel was closed, temporarily, the city would not allow the motel to re-open because the land it was on was less than one acre. The seller had to tear the motel down and the lot has been vacant for 30 years.

@Hope Fick ...based on your last message, I'd suggest you probably talk with the local bank first (the one you don't want to rock the boat with), and see what their thoughts are with regards to what you're planning/trying to do.  That way they aren't blindsided.  If they aren't able to move forward on something, whether now or in the near future, then it'd likely make sense to start talking with other lenders. If the numbers check out to what you mentioned, then you probably have a ton of equity locked up, as long as there are comps to support, and you could rinse/repeat this model if it's in such a demand as mentioned.   Experience talking, these deals are not easy, no matter where they are (I've had clients with similar situations in other areas, such as FL, where motel/hotel conversions are more a norm).  

I wished there were comps! No one has done anything like this around here. I think there’s a few in Kansas City Area. Locally had a 32 unit 1 bed complex sell for about 1.4 million over the summer. But zero converted spaces. I’m really hoping someone can look at the income and expenses and do a value calculation that way. I had 5 calls today, 4 were vets, 3 were on the street. We have 0 openings. 

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@Hope Fick ...an appraiser will figure that out and/or with the lender.  Because value is usually a combination of income and sales comp approach.  With replacement cost sometimes factored in there.  When you start looking and/or having those conversations, put me on the list or just PM me and we can chat at some point.  Like I said, a lender will definitely be taking into account the rent roll and income/expenses, etc., but these aren't easy. 

This is amazing what you're doing for the community.  I assume these are section8 tenants?    how do you vet them? was looking at doing something similar on a smaller scale in the very unaffordable palm beach / broward county areas of south florida.

The value will depend on the lender, but I feel most will use about a 6.5-7% cap rate on NOI. They will want to use some of their expense numbers for NOI calculations as stated above, especially if any of your expenses are unusually low. I agree with the bank wanting 12 months of seasoning to be comfortable with rents and expenses.

I realize most multi-family properties are trading at less than 6.5-7% cap rates, but the banks are conservative and realize cap rates will expand some time in the future. They don't want to be left with a bad LTV loan on the books.