I am considering purchasing a package of 3 duplexes located in what I would consider a transition point between high-end ($500K homes) and lower end (30K homes). There have been no recent sales in the very neighborhood these properties are located, and I'm a bit stuck on what value to place on the properties.
With an asking price of $200000, and monthly rents of ~$5200 the CAP rate comes to about 16% - Normally I'll take that any day, but the prices per square foot of the closest recent sales, a few blocks down, would bring the value of these properties to range between $120K-$150K. The owner argues that those recent sales are in a very different neighborhood, and so don't count.
While I should cash-flow easily at the current price, I'm concerned about what happens if I decide to refinance or sell these someday.
For small multifamilies, what strategies do you use when calculating the value?
This is Rochester, NY by the way.
@Chiagozie Fawole your concerns are definitely valid. The comps you reference, where they pulled by a Realtor? Was the properties looked at good comps? Meaning was the style of property the same i.e. Hi ranch vs Hi ranch or Colonial vs. Colonial? Also the time of sale (within 3 months) should be factored in to getting a "good comp". Also condition, square footage, bathrooms/bedrooms are also factors. As an investor you never want to purchase a property at market because you money will be tied into the property which reduces liquidity... Also in addition to the monthly rents, what are the expenses? are you factoring all of the other costs of operation i.E. vacancy, utility, Cap Ex, property management costs(I've heard that Rochester is notorious for poor performing property managers)Routine maintenance etc.... Is the owner open to seller financing?
Hello @Shawn Ackerman , Yes, The owner is willing to finance - which is why I'm considering the deal. I considered the expenses in calculating the NOI. I initially used Zillow for the recent sales, but our property manager, who has access to the MLS, corroborated the information I got off Zillow. If I held the property forever then I won't have any concerns.. just wondering about what would happen if I wanted to refinance.
@Chiagozie Fawole pm me the addresses and I will spit back a good idea of value. I'm sitting at my desk right now and have access to all the core logic and mls data.
If the three duplexes are all right next to each other I usually assign higher value because I prefer to have the control of three places right next to each other.
I have been a Rochester city resident for 11 years and know it like the back of my hand. I can definitely help.
@Chiagozie Fawole I go you. In the case of seller financing, I'd be more concerned about the COC return then refinancing. I have purchased properties at market because the COC (Cash on cash worked well. How long would it take you to recoup your down payment? Kind of difficult to get cash flow and appreciation in the same deal unless you can fully understand the motivations of the seller and capitalize on them. What are the terms of the deal? You definitely don't want to be put in a position where you cannot get the seller paid at the end of the term. If you do not feel comfortable with the deal then I'd walk if you don't think you can get out in time.
Yeah if you at least give the street(s) we could let you know if the numbers are in the proper ballpark...
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