What is the market for multifamily homes in Michigan?

Question

I'm currently looking into hacking a duplex home (also my first investment), and I have a good estimate of what the cost and monthly expenses will be on the particular property I'm looking at. However, I'm not sure how to estime how much it will be worth in the end considering the updates I make, and what the market is for multifamily homes in my area. Does anyone have any suggestions about how to estimate the worth, or how to do research on my local market?

Thanks!

Lauren

Thanks!

Lauren

Jeremiah Jordan · Answer

Account Closed It's awesome to hear that vacancy rates and costs are low here though. Thanks for pointing me to the RPOA in another post. I'll be taking some classes in January. Perhaps I will see you around.

Lauren Baker · Answer

Account Closed that was great advice! I'm very new to REI and am scared to know if something is a good deal just by ballparking it. Those calculations should come in handy, although I may have to review them a few times.

Lauren

Account Closed · Answer

Great, @Jeremiah Jordan.  Look forward to meeting you.

Account Closed · Answer

Sorry...you're right @Jeremiah Jordan, I was typing too fast and mixing up my percentages and months...I should do a better job of proof reading!  Your vacancy expense number is correct for 1.5%.  And, this is generally true for the "average" Grand Rapids rental.  Keep in mind that some rentals rarely turnover, i.e. people will rent the same unit for years--so, the average is probably unrealistic.  It really is best to use the vacancy rate that is typical for the area where your unit is located. The vacancy rate also will depend on how well the property is managed.  Happy Holidays!

Account Closed · Answer

Sorry for the type...the line near the end of my post should be:

"Will the market support enough monthly rent to leave you with $834 dollars of net income each month? If it won't, how much will it support?"

Account Closed · Answer

The most important value will be based upon income.  The formula is net income / cap rate = value.  The calculation assumes a cash purchase.  For example:  If the net income for your property is $6,000 annually and the cap rate is 10%, divide 6,000 by .10, which equals $60,000 (the income value of the property).

Net income should not include an expense for loan payments or interest but should include vacancy expense.  Rentals turn, on average nationwide, once every 9 months, meaning that the national vacancy expense would be equal to 3 months' worth of rent.  This should be adjusted for your area, e.g. Grand Rapids current vacancy rate is 1.5%.  For the GR average the vacancy expense for a $1,000/mo. unit would be $1,500.  However, if the property is in a neighborhood where experience shows that vacancies are more frequent or less frequent, the number should be adjusted accordingly. If you include a "management expense" for yourself, make sure you don't overinflate the number.  You could use the average rate that management companies use in your area.  The cap rate is usually adjusted for the area where the property is located.  10% is average.  For a property in a high risk area, the cap rate would be higher--maybe as much as 20-25%.  If the area is fabulous with high rents, very little turnover and excellent tenants, the cap rate could be as low as 6% or more.

The other expenses used to figure the net income are the typical ones most people think of, i.e. maintenance, utilities (if you pay for them), snowplowing, trash removal, property taxes (not income taxes), insurance, etc.

Savvy future investors will want a greater rate of return on a high risk property therefore they will pay less for the property.  The difference in value in this example would be anywhere from $30K to $100k.

As you can probably see, the future value of the property is important to determine before buying and making repairs or upgrades.  If the repairs needed are too costly, you might have to pass.  Also, over remodeling/upgrading the unit might also leave you holding an empty bag.

The great news with the income formula is you can work backwards.  Take the advertised selling price and multiply that by the cap rate.  For example:  If the selling price is $100,000 and the cap rate you use is 10%, the net income must be $10k.  Will the market support enough monthly rent to live you with $834 dollars of net income each month?  If it won't, how much will it support?  In other words, based upon the net income and the amount of money needed to get the property market ready, how much is the property really worth?  If it needs $50,000 of work and the net income will only support a $80,000 price, you shouldn't offer more than $30k.

All of this is a quick way to determine value.  The tricky part is usually determining the amount of money needed to make the repairs and upgrades.

I hope this was helpful!  Good luck with your investments!

Jeremiah Jordan · Answer

So if I understand the math , with a vacancy rate of 1.5% we would multiply the monthly rent of $1,000 by 1.5 to get the $1,500 dollars in yearly cost you came up with? Sorry still new at this. I figured if the vacancy rate is 1.5% it would be 1.5% of the monthly rent. So $15 a month or $180/yr which now that I am saying that does seem awfully low. It is great news to hear the vacancy rate in GR is so low though.

Josh Cunningham · Answer

Sometimes doesn't matter depending on return on investment. Have a property I bought cheap and recoup investment in 2 years but not in the best neighborhood, could not resell at all but a cash cow if your willing to get in to section 8

Sam Ball · Answer

@Lauren Baker I would do a quick search on Zillow for recently sold properties with your properties specs. That will give you a ballpark. Then you can adjust for the different updates that yours may or may not have compared to the ones that have sold. The realtor that you use can also pull some comps also.