Multi-Property Single Family Portfolio -Nashville, TN

31 Replies

Hello, I am a broker and wholesaler in Middle TN..I have an offer in on a group of residential properties. There are 4 single family properties and 3 duplexes in this group. I am new to wholesaling and very new to valuing a mixed residential portfolio and wanted to seek some help.

Each of the 10 doors is rented at or above market rent. Several long term tenants. Minimum lease term is 2 years. Three of the single family properties are going to require flood insurance. The properties are in good condition from the outside and the locations are decent.

Does anyone have advice on the best way to establish value on something like this? Monthly rents are $8320.

SFRs and duplexes are valued using the comp method.

Agree with @Jon Holdman : you need to evaluate these one at a time - find the comps for each one and add all the 10 properties.

You can also use a spreadsheet like the one below. You can do a goal-seek in excel and calculate what the sales price will be if the investor likes a 15% CCR. I do this when I wholesale properties to landlords.

While you can use the comp method, if you are trying to sell to an investor, you have to consider the cap rate also. If you are selling them as a package, the buyer is certainly an investor. If you sell them one by one, you can do comps alone. As an investor, rents of 8400, apply 50% rule gives NOI of 4200. Thats an annual rent of 50,400. The cap rate depends on the neighborhood but I would rarely do less than a 10 cap so that puts a max value of about $500K. If its a solid B to B+ may go a bit higher and for a C it may go a bit lower. But thats what its worth to an investor. Also any investor willing to buy a package will certainly demand a discount to the sum of individual values.

Thank you Wendell and you as well Jon.

I'm going to have to disagree with @Anish Tolia a bit on this. They're SFRs and duplexes. Their value is determined by comps whether you're selling to investors or owner occupants. If you mean the income approach might be considered if an investor wants to pay less then the value from comps, then I'd agree. But I've seen people try to get a value higher than what is supported by comps based on income. The thinking is if an investor will pay a price from, say, a 10% cap, then they will pay more than if they were just buying them individually off the MLS. I seriously doubt it. Investors aren't that dumb.

@Monica W. this seller will achieve the maximum price by putting them onto the MLS and selling them one at a time. They're going to give up some of their possible returns by selling them as a package.

I'll throw my hat in the ring.

It really depends on whom you are selling to. In the absence of lots of inventory available on the MLS with tenants in place, private equity and to a greater degree publicly traded REITs will routinely pay a price based on the cap rate of a portfolio of rentals (including SFR and duplexes), and this is precisely how these properties are valued. It is more important to allocate capital quickly at entry points that support yield demands than to optimize each individual property. If you want to call this dumb, then be my guest, but it is precisely how these companies operate. Ultimately, without knowing their cost of capital and fee structures with their capital sources, it's pretty tough to have an opinion one way or another on the intelligence or competency of the company.

Now, if you are selling to an individual investor, they will likely have very different goals, and you may very well have to sell based on comps instead of cap rate. But why sell to an individual when there are plenty of private and public companies willing to buy the product, especially in a major metro area like Nashville?

As a point of reference, we'd pay about $350-375K for the package if we bought in Nashville and a lot of my assumptions about the inventory itself are within a certain degree of correct.

This information has been very helpful. My only instinct before putting in the offer was to value each property based on recently closed comps within a 0.5 mile radius. Just as I would do on any SFR property. My offer was 82%(arbitrary) of the sum of those values. So I was on the right track. But I second guessed myself.

I began to think, "what about the present value of the future cash flows?"...."isn't there value to be had in that aspect?" "maybe portfolio valuations are different...etc. etc." either way, when my initial offer was rejected, I agreed to the seller's price with terms that involve the seller holding back a zero payment zero interest 2nd with a 48 month call. If it happens and all is well with due diligence AND I can find a private lender who agrees to lend based on the contract value, then I am a landlord, if not, then it wasn't meant to be. Either way, I've learned a valuable lesson in portfolio valuation.

Thank you to each of you for your help.

@Jon Holdman Of course you are correct. An investor would pay the LOWER of the two approaches. I just meant that if you want to sell a package, the buyer is necessarily an investor and would consider the cash flow.

Originally posted by @Anish Tolia :
While you can use the comp method, if you are trying to sell to an investor, you have to consider the cap rate also. If you are selling them as a package, the buyer is certainly an investor. If you sell them one by one, you can do comps alone. As an investor, rents of 8400, apply 50% rule gives NOI of 4200. Thats an annual rent of 50,400. The cap rate depends on the neighborhood but I would rarely do less than a 10 cap so that puts a max value of about $500K. If its a solid B to B+ may go a bit higher and for a C it may go a bit lower. But thats what its worth to an investor. Also any investor willing to buy a package will certainly demand a discount to the sum of individual values.

A cap rate is only good for comparison to other similar properties that have sold. Where are you going to find a market cap rate for a portfolio mix of sfr's and duplexes? Where? Why yould you even bother trying to calculate some fake cap rate when you can easily comp each individual property and say add those numbers?

Cap rates are set by the market. If you have some arbitrary number that is not in the market range that just means YOU are not in the market. Kinda like a "buyer" in SF in the market for a $100, 000 sfr.

Originally posted by @Anish Tolia :
As an investor, rents of 8400, apply 50% rule gives NOI of 4200. Thats an annual rent of 50,400. The cap rate depends on the neighborhood but I would rarely do less than a 10 cap so that puts a max value of about $500K. If its a solid B to B+ may go a bit higher and for a C it may go a bit lower.

Please show me a professional investor that calculates a cap rate by defining noi as 50 percent of gross rents. That is absurd. You are mixing two completely different real estate concepts and applying them incorrectly.

Bob, he was using rough ratios for back of the envelope calculations which were approximately as accurate as they needed to be to make a valid point.

And in all fairness aren't you the same guy who chooses to speculate in Hawaii with negative cash flow based on some ridiculous expected 10-15% perpetual appreciation?

Originally posted by @Steve B. :
Bob, he was using rough ratios for back of the envelope calculations which were approximately as accurate as they needed to be to make a valid point.
And in all fairness aren't you the same guy who chooses to speculate in Hawaii with negative cash flow based on some ridiculous expected 10-15% perpetual appreciation?

Um....what point do you think he made? Perhaps you would be better than he at explaining how a cap rate is calculated using the 50 percent rule and then how a professional investor would apply that number for an investment decision. That would make an interesting and educational discussion that I would like to participate in.

@Monica W. Where part of town are these properties located in if I may ask?

Madison and Hermitage

Originally posted by @Monica W. :

Each of the 10 doors is rented at or above market rent. Several long term tenants. Minimum lease term is 2 years.

Monica, I am curious why residential properties would have multiple year leases and have above market rents.

Bob,

I can't answer that for you. But my offer is subject to verification of both.

@Bob Bowling Calm down dude! Wheres that Aloha chill? Of course a serious investor would look at the income and expenses of each property individually. I was just illustrating with simple back of the envelope calculations. Of course the cap rate is set by the market. In the Bay area you would never get 10%. The point was that when you sell a package, the buyer would be an investor and would consider the cap rate. What an acceptable cap rate is to an investor varies by market, investor etc. You can buy negative cap rates if you like, I choose to have a threshold. I showed a simple way for the wholesaler to approximate the value by considering cap rates.The 50% "rule" is rough but seems to work well in a certain segment of the market. At the $800 per door rent segment it works remarkably well by mine and others experiences. Also, at 800/door rent this is not the Bay Area either so I would not expect cap rates much lower than 10%. Given that, my rough guidance is most likely correct.

@Jake Kucheck that is some crazy stuff! Good for sellers. And that must be pushing up values in those areas. There's a business model there if you can pull it off. Pay retail for properties off the MLS, rent them, package them and sell them to a hedge fund for above market prices.

Originally posted by @Anish Tolia :
@Bob Bowling Calm down dude! Wheres that Aloha chill? Of course a serious investor would look at the income and expenses of each property individually. I was just illustrating with simple back of the envelope calculations. Of course the cap rate is set by the market. In the Bay area you would never get 10%. The point was that when you sell a package, the buyer would be an investor and would consider the cap rate. What an acceptable cap rate is to an investor varies by market, investor etc. You can buy negative cap rates if you like, I choose to have a threshold. I showed a simple way for the wholesaler to approximate the value by considering cap rates.The 50% "rule" is rough but seems to work well in a certain segment of the market. At the $800 per door rent segment it works remarkably well by mine and others experiences. Also, at 800/door rent this is not the Bay Area either so I would not expect cap rates much lower than 10%. Given that, my rough guidance is most likely correct.

Aloha Spirit here and in that spirit I'm trying to kokua and show you how you are incorrectly computing and utilizing a cap rate. Anyone can just make up a number (noi) and divide it by the purchase price and come up with a crap rate because that is exactly what it is! A cap rate should not be used for small residential properties. For a cap rate to mean anything you MUST be able to show ALL the components for an investor to make an intelligent decision. For example, what percentage of your crap rate is attributable to v&c? If it is a large part of that it skews the value way more than if it is maintenance. An investor would be able to determine that your 5% v&c is NOT market and your cap rate is incorrect.

Commercial sellers and buyers spend tens of thousands of dollars to analyze each component of a cap rate. They then subscribe to publications that report actual sales and analysis of the individual components of the cap rates for the type of property and the market at a specific time. I don't believe there are such publications for sfr's and duplexes so even if you went to all the trouble to get accurate figures WHAT would you have to compare them with? Why not just use a GRM which would be MUCH easier to get accurate numbers since all you need are market rents and sales price if you really need to use an income approach to value a sfr.

"Acceptable" cap rate? If the market cap rate is 8% and your "acceptable" cap rate is 10-12% then you are NOT an investor in that market at that time.

Call you local chapter of the Appraisal Institute or your Assessor and ask what "cap rate" they use to value duplexes and sfr's. Report back.

Originally posted by @Bob Bowling:
Originally posted by @Steve B. :
Bob, he was using rough ratios for back of the envelope calculations which were approximately as accurate as they needed to be to make a valid point.
And in all fairness aren't you the same guy who chooses to speculate in Hawaii with negative cash flow based on some ridiculous expected 10-15% perpetual appreciation?

Um....what point do you think he made? Perhaps you would be better than he at explaining how a cap rate is calculated using the 50 percent rule and then how a professional investor would apply that number for an investment decision. That would make an interesting and educational discussion that I would like to participate in.

And while you are at it can you explain what you are "seeking" on your profile? SFR out of state from 75-100k that cash flow a GRM of 1.2-1.5% I am baffled.

@Jon Holdman I can only speculate as to why they operate that way, but my guess is that it has a lot to do with public perception. When you have gobs of operating capital and a responsibility to your shareholders, you want to be viewed as doing things efficiently. When the Public REITs first entered the marketplace, the aura that surrounded their holdings was that it was a bunch of off-market deals being consummated in a smoke-filled room for pennies on the dollar.

That simply wasn't the case. They bought houses all kinds of ways, but with a few notable exceptions, they did not "steal" them from government entities at John Beck "Free and Clear" prices. They also didn't have a lot of expertise in operations. That led to high vacancy numbers and high expense ratios (we're talking over 100% expense ratios... blowing the 50% rule out of the water, and this is in year 1!). In turn, analysts started asking questions about the viability of the business model, and operations shifted to outsourcing management and buying more properties with tenants in place (even if paying a premium was necessary). In certain cases, it also led to changing the definition of what caused a house to be considered stabilized. In the case of a particular firm, Silver Bay (SBY), they changed the definition of a property being stabilized from having a tenant in it paying rent after rehab had been done (a valid definition) to a property they had owned for 6 months or longer, regardless of property condition or occupancy status.

If you're willing to juke the stats by materially changing definitions to fool the analysts (ok, maybe not the analysts, but certainly the public), wouldn't you also be willing to pay a premium for properties that legitimately improve your vacancy numbers? Of course you would. Especially when your blended cost of capital is in the 2-3% range. If I have product at a 12-cap, and approach a company currently buying at a 5-cap but not hitting their numbers due to vacancy, you don't think they would jump at the chance to buy a bunch of stuff at an 8-cap? It's still a win-win, unless you're a retail investor in that company, but if you're dumb enough to invest in an SFR REIT that operates this way I'm just happy you're not out buying lottery tickets or high stakes roulette.

We can argue until we're blue in the face about the proper way to evaluate a portfolio of SFRs, but at the end of the day, I'm going to sell to the publicly traded company with the most cash, the highest vacancy, and the least regard for market value, because they'll pay me the most.

@Bob Bowling As an investor I care about one thing only RETURNS. I dont care about how appraisers value property. As an investor I want to effectively allocate my capital across various asset classes and wish to compare investments. The correct way to do that is ROI or IRR which is a complex calculation that factors in risk and cost of capital and time value of money. I am not here to provide an economics lesson. Cap rates are a simplification that allows rough comparison between investments. You can argue with me all day an night about how to calculate them and at the end of the day they are all based on assumptions. But so is the return of the stock market, a muni bond or any other investment class. Lets just say you can go invest your way and I will go invest mine. But to say it is wrong to calculate cap rate or any other form of ROI on SFRs and that the only way to do it is via an appraisal is just ludicrous.

Originally posted by @Anish Tolia :
While you can use the comp method, if you are trying to sell to an investor, you have to consider the cap rate also. If you are selling them as a package, the buyer is certainly an investor. If you sell them one by one, you can do comps alone. As an investor, rents of 8400, apply 50% rule gives NOI of 4200. Thats an annual rent of 50,400. The cap rate depends on the neighborhood but I would rarely do less than a 10 cap so that puts a max value of about $500K. If its a solid B to B+ may go a bit higher and for a C it may go a bit lower. But thats what its worth to an investor. Also any investor willing to buy a package will certainly demand a discount to the sum of individual values.

Hey Anish, did you figure a fee simple or leased fee crap rate for Monica? Why would you do one and not the other? How does that change your opinion of value?

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