Selling My Multifamily STR/MTR rental Nightmare

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Selling My Multifamily STR/MTR rental Nightmare

Matthew Masoud
Investor · Orange County, CA · Member since 2014 · 363 posts · 408 votes

So I purchase value add small multifamily and convert them to STR/MTR.

My plan was to purchase them, repair the units, furnish all or most units, MTR/STR the units, cash flow like crazy, and then sell when I'm ready to move on.

All has worked out except for that last step. It's surprisingly hard to sell these assets as MTR/STRs

Let me give you a concrete example:

Purchased a 6-unit property for $200,000. Repaired and furnished all the units and listed them MTR/STR. The property now spits off $3-4k/month AFTER all expenses are paid ($7k gross).

At a 12% cap rate property is valued at $400k. The issue is lenders/sellers don't want to pay/lend a premium for the STR/MTR revenue.

Calculating long-term rents, the property would be worth about $300k. I'm getting offers at $300k-$320k. I was able to refinance at a $300k valuation but I don't really want to hold these assets.

I have the same issue with another 10 unit I own and another 6 unit.

You significantly decrease your buyer pool on the exit, in exchange for stronger rental income during the hold.

My investment strategy has always been buy, increase property's income, sell for a profit and keep growing but STR/MTR might not be conducive to this strategy.

For now I'll just keep cash flow these assets till the right buyer comes along.

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Michael BaumPro Member
Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
2y

So @Matthew Masoud, this comes up from time to time. People who want to value the property at a higher rate than comps support. Mostly around SFH's.

I did a survey a few months ago of 8 different lenders. Portfolio, banks, credit unions etc. I called them direct and asked them specifically if they would value an operating STR at a higher value than the comps of similar properties.

All the answers were NO. They don't give value to the STR revenues.

One did say they could put me in touch with their commercial property division that could tell me more about their products that might cover what you are saying.

A DSCR lender will take into account the revenue, but the value of the property is still what others are worth.

The bottom line is that past performance is no guarantee of future success. In the end, to the lender, the property is worth what the comps are. 

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  • Robin Searle
    Real Estate Agent · Colorado Springs, CO · Member since 2017 · 224 posts · 201 votes
    2y

    It so much depends on whether it's an STR and what restrictions there are and if the permit - if there is one - transfers. In Colorado Springs it doesn't. Now the STR value doesn't really matter. In addition you'll need a cash buyer since an appraiser will not include value of furniture or potential rental value in their valuation. Lots to consider with your plan!

    1Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    2y

    I think STR/MTR properties are more like a small business than a "regular" rental property. Certainly it's more work with more regulation risk. Even if a 6plex should sell based on cap rates it might be too close to a 4plex and getting some comparable bias? (If the 6 Plex next door sold for $300k I don't want to give you $400k because you say you're getting higher rents for doing more work.) Try reaching out to other hosts in your area to see if they'd buy? If you're sick or the work hire someone to run it? Hold on until rates drop if you're not?

    You have options at least. 

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  • Andrew McKagan
    Member since 2020 · 2 posts · 0 votes
    2y

    @Matthew Masoud What markets, OH? Have further info you can share?

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  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    2y

    So @Matthew Masoud, this comes up from time to time. People who want to value the property at a higher rate than comps support. Mostly around SFH's.

    I did a survey a few months ago of 8 different lenders. Portfolio, banks, credit unions etc. I called them direct and asked them specifically if they would value an operating STR at a higher value than the comps of similar properties.

    All the answers were NO. They don't give value to the STR revenues.

    One did say they could put me in touch with their commercial property division that could tell me more about their products that might cover what you are saying.

    A DSCR lender will take into account the revenue, but the value of the property is still what others are worth.

    The bottom line is that past performance is no guarantee of future success. In the end, to the lender, the property is worth what the comps are. 

    4Reply
  • Adam WindhamPro Member
    Lender · San Diego | Phoenix | Miami · Member since 2019 · 39 posts · 65 votes
    2y

    Hi @Matthew Masoud - I can confirm that most lenders will NOT value the property any higher just because it is generating more cash flow operating as a short term rental or mid-term rental. A lender is always concerned about a default scenario where the property is foreclosed on and then needs to be sold, and there is no guarantee a future buyer would operate the property in the same short term/mid-term manner or pay the same premium above the standard comp value.

    That said, there are buyers out there that WILL pay that premium because of the higher cash flow and established operating track record. That premium just needs to be made up with equity because they will be constrained on the amount of leverage they can get from a lender for the same reasons. 

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  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    2y
    Quote from @Michael Baum:

    So @Matthew Masoud, this comes up from time to time. People who want to value the property at a higher rate than comps support. Mostly around SFH's.

    I did a survey a few months ago of 8 different lenders. Portfolio, banks, credit unions etc. I called them direct and asked them specifically if they would value an operating STR at a higher value than the comps of similar properties.

    All the answers were NO. They don't give value to the STR revenues.

    One did say they could put me in touch with their commercial property division that could tell me more about their products that might cover what you are saying.

    A DSCR lender will take into account the revenue, but the value of the property is still what others are worth.

    The bottom line is that past performance is no guarantee of future success. In the end, to the lender, the property is worth what the comps are. 


    Exactly! The property is always going to be worth (to the financier) the best, most practical & logical use for the property. Just because *you* can make that kind of revenue with it as an STR (which would beg the question why you'd want to sell at all), doesn't mean anyone else can do it especially a bank which may be forced to foreclose on the property. A single family home, condo or townhouse is always going to be valued as such regardless of whether someone lived there or ran Microsoft out of the dining room.

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  • Stuart UdisPro Member
    Attorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
    2y

    There are three things going against you here. 

    1. Lenders are going to instruct the assigned appraiser to rely on market rental rates, not the STR rental rates you are able to collect.

    2. More and more municipalities are cracking down on STR's. As hotels lose market share, these municipalities are losing out on hotel taxes and misc. revenues that are difficult to collect from the small mom and pop STR operators. This trend will continue to intensify.

    3. Remember most STR operators have portfolios that do not consist of 5 star hotels quality assets where brand awareness plays into the value a buyer is willing to pay. There is typically very little that differentiates your STR property from other properties other than the fact you operate the building as an STR. Why can't a buyer purchase a property, furnish the units and use all of the leasing and management technology that's now available at low costs to replicate your business model? There is no need to pay the premium to acquire your business. ***

    *** The exception to this is if your STR is located in a municipality that has implemented operational restrictions but in most cases I observe, the right to operate extinguishes when the property is sold. If you want to your STR to perform well on the sale, the property should be located in a market that has strong demand for STR usage and be in a location where you can sell your property with the in place permitting/licensing, but restrictions prevent others from replicating the business model.

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  • Jeff MurrayPro Member
    Property Manager · Saint John N.B · Member since 2020 · 36 posts · 10 votes
    2y

    Matthew have you opted to look at any seller financing to assist with this?

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  • Andrew SteffensBusiness Member
    Tampa, FL · Member since 2022 · 3k+ posts · 3k+ votes
    2y

    Seconding what everyone else is saying that the value does not go up with STR versus LTR rates. However, one of my partners did successfully sell somewhere in between STR and LTR value. He had to hold back a second mortgage.

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  • Joe S.Pro Member
    Investor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes
    2y
    Quote from @Andrew Steffens:

    Seconding what everyone else is saying that the value does not go up with STR versus LTR rates. However, one of my partners did successfully sell somewhere in between STR and LTR value. He had to hold back a second mortgage.


     I didn’t even know Lender still allowed sellers to hold back a second mortgage these days.

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  • Sarah KensingerPro Member
    Real Estate Consultant · OH · Member since 2023 · 2k+ posts · 1k+ votes
    2y

    Some of these comments are somewhat amusing and definitely from a residential investor mindset. But boy can I understand your frustration!! You're on the seller side, we were on the buyer side for almost the last year. It's absolutely impossible to find a lender to back you up on one of these types of properties, or even a very small motel!! Cap rates are beautiful and they should be easy to get lending due to their net revenue, but everybody is so concerned they won't keep producing the same as they have been. 

    Best of luck and BTW if you're interested in seller financing at all, we have many connections that may be interested in your properties.

    [email protected]330-557-3021
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  • Matthew Masoud
    OP
    Investor · Orange County, CA · Member since 2014 · 363 posts · 408 votes
    2y
    Quote from @Andrew McKagan:

    @Matthew Masoud What markets, OH? Have further info you can share?


     Dayton, OH

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  • Bonnie LowPro Member
    Lender · Asheville, NC · Member since 2016 · 1k+ posts · 1k+ votes
    2y

    Dayton is tough because the LTR market rents are not that great in most areas and this will be the default underwriting number most lenders use. Same for most investors. I always run a conservative estimate based on LTR rents. I'm not sure when you bought these but I'm guessing you have a better interest rate than most investors can get now so even though they cash flow for you right now, there's a good chance they won't for someone else taking over the loan. A DSCR lender will take into consideration the STR revenue and maybe even the MTR revenue - there are several lenders who specialize in STR lending via DSCR loans - but as an investor, you pay a premium interest rate for this. I run the numbers all the time on these types of deals and they rarely pencil at at the seller's price AND today's interest rate and down payment. As others have suggested, if you want to offload these cashflowing properties, you may need to either come down on your price or offer seller financing or possibly even get into a subject to deal so someone else can take on your interest rate. Or just hang onto the awesome cash flow. That alone feels like a win.

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