Do You Use Comps or Financial Formulas to Determine Price on 2-4-units?

Question

Is there a best approach when valuating a small multifamily property (2-4 units)? Seems a lot easier to valuate based on NOI and Cap Rate through a basic present value formula than to do a comp analysis...is there a reason for doing one over the other...or an argument for doing both?

Dan DeMott · Answer

Hi @Brandon Sturgill ,

I suggest both. You need to run the financial analysis to understand what the cash-flow will look like based on your investment capitalization (debt & equity) so you will be calculating the NOI anyway.

Once I calculate a cap rate based value, I compare that to the comps. If there is a big difference between the comps and my value, it's time to double check your rent/expense assumptions, or your return (cap rate) expectations.

As @Scott Morris mentioned, appraisers are going to review the comps for their report so you should know what those numbers will look like.

Brandon Sturgill · Answer

Right on...this is a steep learning curve for me right now...realtors don't seem to be much assistance.

Account Closed · Answer

Well you need the NOI analysis and the sales price. Where would you get this information from the comps? That's the issue.

Brandon Sturgill · Answer

@Bob Bowling as long as you have access to NOI, it's a non-issue. The problem is gaining pro-forma on these small properties that are typically run by an individual....

Account Closed · Answer

Where would you get cap rate comps? That's why it's not practical to do an income approach on small residential properties. Stick with sales comps and GRM's.

Brandon Sturgill · Answer

@Dan DeMott @Scott Morris Thanks, gentlemen...your guidance is appreciated.

Scott Morris · Answer

Comps.

The lenders/appraisers will usually value based on comps on 1-4 units. They don't usually use NOI and cap rate until you are into commercial loan space. Even if you get a commercial loan they can use the comp method for the 1-4 units.

Although, it is easier to use NOI and cap rate it is not what is important. You need to know what you can get a loan for or what you can sell it for (and then what the buyer can get a loan for).

Regards,

Scott

Do You Use Comps or Financial Formulas to Determine Price on 2-4-units?

Do You Use Comps or Financial Formulas to Determine Price on 2-4-units?

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