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

7 Replies

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?

Medium grey red iconBrandon Sturgill, Hypothetical Insight, LLC. | [email protected] | 614‑379‑2017 | http://www.InvestHypothetical.com

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

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.

Originally posted by @Brandon Sturgill:

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?

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.

Originally posted by @Brandon Sturgill:

@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....

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