All Forum Posts by: Kevin K.

I was always a taught to use a vacancy rate that is reflective of the actual maket rate. If your subjects market has 10,000 units and 9,500 are occupied, you occupancy rate is 95%, the inverse would be your vacancy rate of 5%. Obviously obtaining this data isn’t an easy task, however it may help explain the supply and demand of your sub market. As such, if the subject’s market is experiencing significant growth with little to no new apartment inventory being built or in an area where local or polical opposition would prevent new construction. A lower vacancy rate of 2-5% May reflect the actual vacancy rate of a stabilized apartment building in that market. Conversely, if your property is in an area with a declining population or a large employer just moved/closed using a standard 5% vacancy rate may not reflect the current market. 

Moreover, the other component is credit loss or collection loss. This, I feel, should be reflected of the tenancy and neighborhood class. A typical 1-2% collection loss rate applied to a class D neighborhood with constant eviction and turnover issues, would be misleading.  

I would 100% try and obtain an actual rent roll for the current owners in order to project your Potential Gross Income. Then compare the current rental rates to market rental rates. This will come into play later when determining an appropriate cap rate. Then deduct a vacancy and credit loss rate, REIS or CoStar May have this data. In regards to projecting the subjects expenses I would analyze the historical operating statements of the subject property in conjunction with similar properties. Sometimes LoopNet or MLS will have income and expenses attached to the listings of comparable properties, just make sure they're actual expenses and not Profoma numbers. You can tie in some national indices also, if you have access to that data, Kopaz Investor Survey, apartment owner association, etc.

In regards to extracting a capitalization rate from comparable sales. I would speak to a local broker in your area and see where things are selling at, see if they could provide recent sales with financial data supporting what their saying.  I’d also check out some current listing to see where cap rates are in your area. Furthermore, if you have access to the financials, take a look at them in relation to the cap rate, are the rents below market? Is there notable upside upon renewal? Did the broker or owner go light on the expenses? Did they exclude certain expense line items? 

Whether you’re determining market rental rates or extracting a cap rate. The overall mindset to keep, in my opinion, is to make as much as an apples to apples comparasion. 

Lastly, if there is limited data in your subject market to properly extract a cap rate, you can also “build a cap rate”. Most investors unknowingly do this when they state their expected cash-on-cash return. This is called the “band of investment” technique, whereby you take the weighted average of your mortgage component and the weighted average of your equity component adding them together to build a cap rate, for example:

Mortgage- 75% LTV , 4.5% interest rate, 25 year amortization. This equates to a 6.67 mortgage constant or mortgage cap rate- weighted rate= 5.00

Equity 25%, 15% required cash-on-cash return (as determined by you), weight rate= 3.75

So your required going-in cap rate for the deal would be 8.75% 

Hope that last part wasn’t to confusing, 

Good Luck, 

I concur with what some of the above posters have stated in regards to DSCR vs. LTV. I've seen some deals where the underwriting is very light on the expenses and vacancy rates with tight debt coverage ratios. Even a 1.30 dscr on a retail strip of say 4-5 tenants or less can run into trouble if you have a long term vacancy. Dropping your income by 20-25% and no being able to service the debt can get you in trouble. A multi-family building with an LTV of 90% is risky and would be under water if values dropped 15-20%, but unless the owner needs to refinance soon, they should be ok.

Unfortunately due to the new rent laws in NYC which have driven cap rates up. This exact problem is happening. Many people refinanced and cashed out at sub 4% cap rates. The income on many of these rent stablized buildings hasn’t increased enough to keep up with the change in cap rates. So things are getting pretty tight here. When the owners are trying to refinance. 

There are some neighborhoods in Queens also, Astoria, Ridgewood, even Bayside if you don’t mind going further out east. I think it’s a great idea, I’m trying to find a single-family home with an apartment further out east in Suffolk County to help with the $500,000 price point and $12k yearly taxes. To be honest I’m surprised more people aren’t doing this, with the high cost of housing in the area. 

Good Luck!

It seems a lot of Long Island investors like Connecticut. I have a friend who is from my area on Long Island and he invests around Bristol and West Hartford. To be honest seeing cap rates of 7.5% and up, it can be quite enticing. Around my area (Suffolk County) multi’s are hard to come by and sub 6.0% cap rates are the norm. NYC and the boroughs are even worse.  

I agree with the other posters, the Bank Appraiser will most likely value them based on the Sale Comparsion Approach as with other 2-4 family homes. However, the bank my underwrite then based on their current cash flows in relation to the debt service on your loan.  

I’m located in Suffolk County, Long Island. I’m a certified general Appraiser and I work for a local lender in their appraisal department. I agree our area is rough for investing. Also the new rent laws have made it even rougher. I see deals coming across my desk everyday and I can’t believe what some investors are willing to accept as a return. Unless it’s a flip, value added play or a refinance that was purchased years ago during the recession. Many of these properties have cash flow and debt coverage issues. Moreover, a few owners whom buildings I’ve appraised indicated they were pulling out cash to invest else where, Uostate, PA, CT and even the Southeast. 

Do most of you invest out of state? 

This is a very interesting topic with various view points. The dilemma I see is the current market I’m in (NYC-Long Island), is similar to the above posters who stated is just doesn’t cash flow and can barely service the debt after accounting for reasonable expenses. Moreover, the barriers of entry are very high. Most 2-4 family homes on Long Island start at around $500k, small apartment 5-15 units can easily break into the millions. Whereas, I have a friend investing out-of-state, roughly two hours away, who has purchased 5-10 unit properties for a similar price point. So an initial downpayment of $75k-$125k can go a lot further in other markets. 

In regards to risk and reward, in a balanced market that would be true. However, in the local NYC market you have owners who refinanced after substantial appreciation and self manage. So they will buy what ever they can within their local market. Currently, cap rates on multi-family buildings range from 4.0% to 5.0% in the NYC area. Even after the passage of strict rent control laws in June of 2019. I underwrite these properties all day and most have trouble with the dscr (debt service coverage ratio), which we set at 1.25 for multi’s. We have a lot of NYC investors looking else where. The only investors who are getting big returns around here are value added plays. With that being said, I can personally see why a 7.5%-8.5% cap rate in another area is very attractive. Personally, I wouldn’t go further out that a 2-3 hour drive, but that’s just me.

So my options would be to invest in a two-family locally, have to self manage it and hope to see a 5%-7% cash-on-cash return or invest out of state and see returns close to double that with a property manage taking care of “most” the operation. 

Where did the broker get the 7.00% cap rate from? Your numbers indicate a 3.2% going-in cap rate. 

As the others have stated, a 3rd party bank hired Appraiser would most likely utilize the Income Approach with secondary support from the Sales Comparasion Approach. If the income was $0 the Appraiser can still utilize the Income Approach. They would have to stabilize the cash flow and determine a potential gross income. For example (36 storage units x $50 per unit per month = $21,600) + ($8,400) gym rental income = $30,000. The next step the Appraiser would take is to determine the operating expenses R.E. Taxes, Insurance, utilities, management fees, payroll, etc.. Assuming ($12,500) in expenses. They would arrive at a forecasted Net Operating Income of $17,500. Applying a 9% cap rate, as the other posters have indicated is typical or what the appraiser cancextract from the market, Would equal an “As Stabilized” value of $195,000 upon stabilization  ($17,500/.09%). In order to arrive at an “As Is” value. The appraiser would have to deduct lease-up time say 6-months (-$10,800), lease-up costs and any repairs in order to get the units maketable. Say the total cost is ($25,000), deducted from the “As Stablized” value to arrive at an $170,000 current as is value. It should be noted, all these numbers are just to show an example, I have no idea what storage units rent for in your area nor the expenses associated with the subject property.

Is there any reason all 36 storage units are vacant? 

Also, as another poster noted the loan amount does fall below the $250,000 threshold, so the bank can do it internally whether the bank wants to, as it’s a tricky asset, is up to them.