How important is the income for SFH rental appraisal?

Question

All of us who BRRRR properties have probably come across this problem. Our goal is to refinance as much cash out as possible, but sometimes there's not enough data to support the appraised value that we hope for.

I'm currently selling two single-family home rentals in the suburbs of Philadelphia for $110K. They will easily bring $2,200/month in rent after basic updates (flooring and paint) and cashflow $8,500/year after all expenses.

The problem is... there are not many two-bed homes for the appraiser to compare them to when you go to refinance them. Given the income, they should be worth $200K. However, since they are single-family homes, the appraiser may not give that much weight to their income.

There are only three or so two-beds in the same zip code that sold on the MLS in the past year, none of them within a quarter-mile. If the appraiser were to look at them as income-producing properties, I'm all set and should be able to refinance all of my cash out.

So my question is, how much weight (if any) is the appraiser likely to place in the income-producing aspect of the properties? What has been your experience? And have you ever found yourself in a similar spot while analyzing a deal?

If little to no emphasis is placed on the income, thankfully I'm only leaving $10K cash at most in equity which I will recover within a year. If the emphasis is placed on income, the opposite is true. I'll be pulling out $10K more cash than what I put in.

Dan M. · Answer

Every appraisal I have ever gotten has taken it two ways, the income approach and the comparable sales approach. Bank takes the LESSER of the two.

Rich O'Neill · Answer

I have never had an appraiser use the income approach on anything below a 5 unit property. They note it in the appraisal for reference, but they essentially ignore it, and all of the banks I have dealt with ignore it too. The problem is that if you get stuck and have to sell that property, nobody is buying on the income approach. The income is only valuable to you, not the bank.

There have been plenty of times where the income approach would have gotten me a much better appraisal, but I wasn't able to win that fight. It stinks sometimes but it is the reality of single family investing.

Andrew Postell · Answer

@David Haynes this is STRONGLY dependant on the loan types your borrowers will need when buying your properties. Now, if they are a cash offer....it doesn't matter. But if they need a loan then the loan TYPE is really important here.

Generally speaking there are 2 main types of loans for investors: “Conventional” and “Portfolio”

Conventional - I'll define these as loans that come from Fannie Mae and Freddie Mac (if you recognize those names). These loans are all 30 year fixed rate loans. They have the lowest rates we can find and since they are 30 year fixed...they allow us to cash flow better...which helps us qualify for other loans later. This is what MOST lenders offer and what MOST buyer's have access to. These loan types will based the value on the COMPARABLE SALES method. Comps. Rental income might help the buyer qualify....but it does NOT go into the value calculation of the property.

Portfolio - I'll define these loans as loans that come from the bank's own "portfolio" of money. Sometimes referred to as "commercial" loans. Sometimes "DSCR" loans. These loans are a lot more flexible than "conventional" loans. But very few people in the general population use this money type. Now, us investors use this all the time....but a normal, average buyer will not. These loans USUALLY base the value on the RENTAL INCOME method of value...but not always.

Now that's what investors use. So when you are evaluating a property to flip....you will need to base your numbers on who you are selling to. If you are listing the property on the MLS, most people will either be cash or Fannie/Freddie types of money...but not all. Some will also be FHA/VA types of buyers. Those use COMPARABLE SALES method too.

Hope some of this information helps in some way.

How important is the income for SFH rental appraisal?

How important is the income for SFH rental appraisal?

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