How to calculate my DSCR Cash Out Re-FI value

Question

Hey everyone how do I roughly calculate my properties value before I go the bank inquiring about a DSCR cash out ReFi? I know the bank advertises 75% LTV but is it just a comp valuation? How do I factor in the cashflow income the property produces?  Thanks

Jeff Copeland · Answer

There are three methods of real estate valuation:

1. Comparable Sales ("comps")

2. The Income Approach

3. Replacement Cost Analysis

A real estate appraiser can use one, can use all three, or can weight them based on market conditions, the property, and their personal expertise.

A single family home is going to be mostly comps. The lender (who orders the appraisal) may still want a rental analysis done, especially on a DSCR loan product (since it is based largely off income, expenses, and debt service) but the value for the LTV will likely be determined almost exclusively by comps.

The income approach, which looks more at the property's income and cap rate, would be more appropriate for a large multifamily, or a self storage facility, or a car wash.

A small 2-4 multifamily, an appraiser might use a blended approach, and use some weighted average: 80% comps and 20% income, for example.

I think the replacement cost approach is somewhat self explanatory, but market value is often higher than replacement cost.

Timothy Allen · Answer

THIS! great answer. Appreciate the response

@Jeff Copeland 👊

Jeff Copeland · Answer

Duplexes, much like single family homes, will be mostly comps. The appraiser may give some weight to income/cap, but probably not a lot. The truth is, you can calculate, guess, and hope all you want. But you will be paying for a professional appraisal anyway, and it will be gospel for the most part. Ultimately, the V in LTV will be determined by one individual on one particular day: The Appraiser. The good news is appraisers use a very standardized methodology, and there's no reason to think you're going to get a value that's way out in left field. And because of this very standardized methodology, one thing appraiser love is data. Rather than doing your own self-appraisal, I would spend my time putting together a packet of information for the appraiser that consists of:1. Any recent past appraisals done on your properties (or on comparable properties nearby if you can get your hands on them somehow). Also note, if you have an appraisal of your property from two years ago, and you know your market has appreciated by 10% (or whatever) annually, that alone can give you a pretty good idea of the current value. 2. Details info about any improvements you have made to the property. Focus on value add things like new kitchens and bathrooms, floorplan changes, new flooring, landscaping, etc. Sure, it's nice to let the appraiser know about new roofs and HVACs, but these are capital expenditures, not improvements, so they won't add as much value as one might think.3. Any recent comparable sales you are aware of, with as much detail about the transaction and the property as possible. Especially anything that was not listed in the MLS. There might be 10 comps in the MLS that sold for $400k. But if you know the duplex next door that's just like yours sold for $500k off market, the appraiser might completely miss that if the data isn't readily available. 4. Copies of your rent roll and leases. They will need this for their rental analysis. Make their lives easy. Finally, speaking of making their lives easy, make sure you are on top of the actual appraisal appointment when the appraiser visits the property: Make sure your tenants receive proper notice, maybe hint to them to tidy the place up as much as possible, make sure the grass is freshly cut and the exterior is spic and span, and make sure someone is present with keys and all pets are secured. Nothing will annoy your appraiser more than having to make two trips because your keys didn't work, or your tenants refused entry or left their pit bull roaming the apartment when they left for work.

Timothy Allen · Answer

I have (2) duplexes in question.

I’m not sure about the cap rate part but if you don’t mind I can message you on how to get that data

Robin Simon · Answer

how many units?  Do you have access to prevailing cap rates in the market/area for recent sales?

Timothy Allen · Answer

Ok so mine are multifamily. How can I underwrite the way the bank will so I can roughly determine how much equity I’ll have? Is this impossible to do without paying for a bank appraisal?

Robin Simon · Answer

If the property is a single family residence its going to be based almost entirely on comps (recent sales of comparable properties) - if the property is multi-unit then the value is more going to be derived from the income potential.  Generally value is determined by the buyer pool, mots buyers of SFRs will value it not worried about income potential, while multi-unit buildings are de facto investment properties so income potential will drive the value for them

Timothy Allen · Answer

Thanks for all the responses!! Roughly 20% of my valuation comes from rental income was what I was looking for.

Eliott Elias · Answer

They will lend you based off the appraised value, not your CMA.

Devin Peterson · Answer

Hi Tim, divide the anticipated PITIA by the gross income.

Anything >1 you’ll be fine. 1.25+ will get you better pricing.

I’m local to you in mass and would be happy to help you with this also.

How to calculate my DSCR Cash Out Re-FI value

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