My first property, valuation, buy and hold, or sell?

Question

,What is this property really worth?

My first property was purchased in July 2015, a full renovation was complete at end of October, and tenants just moved in this December. These properties are so nice that people got very emotional about being able to rent them. In both cases, the first person who saw them rented them. I have excellent tenants, one has a corporate agency guarantor. The main house is an SFR of 1070sf, and the 2nd unit is a detached ADU of 560sf. Both have central AC, both have granite counters, both have new bathrooms, new kitchens, new tiles floors, new drywall, both have been painted, fully renovated, everything in excellent condition, great quality work. The neighborhood is a C -, blue collar, low income jobs, or no jobs. However, it is a safe neighborhood, and a quiet neighborhood. Other houses on the street are being renovated by other investors or owners, so the overall quality of the area is going up.

My 2016 annual rent income will be: $28,800

Assuming 7.5% vacancy, property taxes, insurance, 5% maintenance, 10% CapEx Reserves, and $4260 for utilities (landlord pays utilities), the expense ratio is 41%, leaving an NOI of $16,870.

The appraisal for the 3/2 SFR, (treating the ADU as a storage building rather than an ADU living area), came back at $121K. The ADU alone nets $9,900/yr (rent minus utilities).

If I marketed to buyers who wanted a 3/2 to live in, and wanted an ADU to pay the mortgage, would I be able to get a significant premium sale price above what the appraisal says?

Also, when selling a property with excellent cash flow like this, how many years multiple of cash flow does one want to get back as net profit on the sale?

In general, how much is a property worth just based on NOI of $16,870?

Thanks!!

Michele Fischer · Answer

Since the neighborhood is appreciating, I'd hold it in hopes that the value will continue to increase. As the population continues to age, there will be more demand for this type of set-up, where aging parents can live in the ADU. If the neighborhood gets hot, if the ADU is viewed as a big bonus to buyers, or if buyers get emotionally invested in the property you may get a premium, but I wouldn't bank on it.

JT Spangler · Answer

I also, and this is just me, think that if a property routinely rents to the first person who views it (and that person is super excited about what a good deal it is) it's underpriced. Since you've just installed your first tenants you don't have enough of a sample size to establish that, in my opinion. But something to keep thinking about.

JT Spangler · Answer

Single families aren't going to be valued on the NOI, the cap rate, the COC, or the GRM; they're going to be valued by the neighborhood comps. It sounds like you own the nicest house in the neighborhood, which isn't good if you're trying to sell. It also sounds like you've overimproved the property relative to what the standard is in the nearby houses. You're also unlikely to get good returns on that when selling.

The ADU certainly adds value to the house -- how much depends on the market and the buyer.

But unless you're planning to sell it, I'm wondering why you need to know the value. Right now I'm guessing you wouldn't be happy with it if it came from an appraiser. That said, if you got in to a transitioning neighborhood early, in a few years when you're not the nicest house you might have some good comps and get a great valuation.

My first property, valuation, buy and hold, or sell?

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