All Forum Posts by: Joshua Christensen

 Hey Ben, you're in that grey area on this one.  

Yes, in a perfect world, NOI is the correct measurement of value. Unfortunately, on smaller MF like this, the listing are usually taken by residential brokers who don't know how to use NOI to value a property. Additionally, these attract a lot of inexperienced buyers who started in the single family or four plex space who are trying to go bigger. They are used to using a sales comp approach to valuation. It's a messy space.

My recommnedation:

1. Look at the sales comps price per unit. (usually the mid)

2. Look at the price per sq foot (usually the highest)

3. Look at the NOI (usually lowest)

Average these out.

Second:  Questions for you

1. What is your exit plan?  long term hold, value add flip in 3-5 years?

2. To get better terms, can you draft off the underlying low rate mortgage with a wrap/sub2 offering?  

3. Will the building cover your expenses in year 1 so you can build revenue over time for cash flow in 1-2 years?

4. What are your goals?  Yield, Capital Gains, Cash flow, Forced Appreciation?

Third:

1. Sellers and Brokers want to get their highest sales price

2. Most listings are based on Proforma numbers, not existing (conflict with buyers that look at existing)

3. Your valuation is what you feel comfortable putting the deal together at.

Ultimately the buyer determines the sales price, not the seller.  Seller's determine the marketing price.  The two of you have to come together in negotiations that work for each side.  That's the real value.  Then the banks and appraisers need to support that value for financing.

Hope that helps.

I tend to agree with the cost to build vs. existing in today's development environment.  That being said, it's not completely undoable.

Reach out to @LaMancha Sims - He's a creative non-bank lender who does a lot of development projects as well as existing stuff.  Good guy to have in your corner.

 Great question.

1. Do you have a housing payment currently?  If that goes away in your house hack, I'd factor that into your cash flow.  

2.  In a house hack, it's your residence so the numbers aren't going to work like a normal evaluation. 

3. You're making a buying decision.  You have to decide if the future after you move and it becomes a 100% revenue property, is it worth the purchase?  Don't over think it.

There's never going to be a "perfect" deal.  After you buy, things happen that blow your original analysis for better or worse.  Real estate is a fluid industry.

the more you analyze, the more reasons youll talk yourself out of action.  Be smart and dont lose money on bad decisions.  At the same time theres a point you just have to take action.

 The rent you're talking about doesn't support a $2MM valuation.  You'll struggle with the debt service at that rate after expenses on a property that size.  Have you considered self storage?  With apartments and housing around it, that could be an option if the zoning will allow for it or a variance from the county.  Much more cost effective, more units, less maintenance, no toilets or showers to deal with.  

I like the affordable housing option as well if you can get some local grants to help with below market financing.  Really, though the cost per unit on construction is high.  Check out the area and see what they are going for.  

Jacob. On smaller deals like this, the valuation is determined by the market demand as appraisers use the sales comp method. Take it or leave it. In my evaluations, I want my smaller properties to have positive cash flow. I plan to hold them long term, so I'm confident that time will be the deciding factor in my returns. I'm a lot less picky on these SFR - 4plex models. Does it pay for itself. The cash flow is negligable on these smaller ones. Typically, maintenance & repair expenses may eat up the couple of thousand you earn annually in the early years. Over time they are much nicer.

Also, when looking at a house hack, I always consider the full rent.  You would be receiving that rent if you're not occupying it, so I run my numbers "as if" it is occupied.  Consider that the other unit is paying or close to paying the debt service and you have little to no house payment.  That is your cash flow as you're keeping it in your pocket vs. paying it to a landlord or mortgage company.

Hope that helps.  

100%.  Yeah, with rates where they are, It's hard to swallow the refi.  Look at two scenarios.  1. On your taxes do you write off the MI currently?  It is income driven so you may not qualify.  2. Refinance raises the payments potentially & the higher interest rate may improve your tax write offs depending on your bracket.  

There are a lot of different ways to look at these things.  I'm glad it helped! 

George, I was a lender for a lot of years. It's also been 12 years since I was, so take this with a grain of salt. PMI is actually a company, a brand. MI is the mortgage insurance lenders require.

PMI is set by lenders on a lot of different loan programs. The 78% rule applied to conventional mortgages. VA has a funding fee and no monthly MI. FHA has monthly MI as well. After the 2008-2010 recession, FHA made changes to their MI requirements that made MI permanent on their 30 year fixed rate loans.

If your loan was in fact an FHA loan when you acquired the property, that may be what you're running into. I think some of the higher loan to value conventional loan programs may have gone to that model as well, but I'm not sure.

Go back and look at your loan papers and look for the mortgage insurance disclosures and how that is calculated.  It should be included in the docs somewhere.  Check the Promissory Note and/or the TILA disclosures.  It might even be on the Certificate of Disclosure.  

Hope that helps.  May not be the answer you're looking for.  Best wishes.

I agree with Simon.  

It's like getting married when you purchase the property. The LLC is getting married before you buy it. With individual LLC's you can handle your taxes on your own. With a joint, you have to wait on the Joint LLC to file your taxes.

It's best to review with a good RE attorney, potentially a business attorney, and your tax professional to make sure you're set up to avoid mistakes along the way.

Also, discuss the ramifications of how it works with your lender (if there will be one) as not all lenders and loan programs are created equal when dealing with LLC's.

 Hayden, congratulations on identifying real estate as your target vehicle to build your life around at such a young age.  I'd echo the idea of house hacking initially.  Buy your first house and rent out rooms to buddies to live with you.  While they are paying the mortgage, continue to save for your next deal to move into bigger deals.  It's Monopoly and there is real money at stake.

4 green houses to 1 red hotel. You can rinse and repeat every few years. When you get your fourth SFR, trade up to a bigger deal with the equity accrued. You can be into some really good deals by the time you're 30 and all your friends will wonder how you did it.

Patience and perseverance.

I agree with @Evan Polaski on this. The NOI / Cap scenario has been around for decades during turbulent and plentiful economic cycles. The biggest challenge I see with the NOI approach is using proforma vs actual to determine values.

Sellers want to use proforma (what could be if...xyz is to happen) yet buyers want actual numbers to determine Today's values.  

Solving this dilemma would be greatly appreciated.  Of course, to the point of long term holds, the purchase price becomes less of a factor.  It's the value add, short-term flips that create the biggest challenges around acquisition costs.  

Ultimately, the NOI is still the most effective way to evaluate the value of the asset.