How would you price this sale?

Question

I am looking at this property in one of the major cities in the Southeast.  Seller and I have not yet discussed price.

4 plex  2bed/1 bath, 830 sq ft each. Total of 4,000 sq ft in the building.

Charming older building freshly modernized and renovated.  Quartz countertops, new stainless steel appliances. Heart pine floors, tall ceilings, tall windows, large moldings, new subway tile bath/shower, new heating and air.

Gross rents $75,000 annually.  Taxes $7,000.  Insurance  $6,000.  Maintenance and repairs  $4000.

Neighborhood is large older SFRs, with only a few apartment properties.

Property values have increased an average 7% per year for the last eight years. The future looks very good.  SFHs are selling for $300 - 350 sq ft.

There are no other rental properties on the market at this time.  It is very rare for rental buildings to be sold publicly.  I have signed a non-disclosure agreement with the seller.

What is your $ number?

Jim K. · Answer

@Jay Weiss

$625K all in would be my absolute maximum in my target area. 1% rule: Gross rent is $6250 monthly. IF the property fulfills my structural requirements, IF my inspector and/or I don't find additional areas of concern, IF the neighborhood checks out.

The rest of it all "charming older building," "non-disclosure agreement," "very rare for rental buildings to be sold publicly," that all sounds like FOMO-chasing, Jay. You pay $1.2 M +/- 7%, that's your business.

Steve K. · Answer

@Jay Weiss 1-4 unit buildings are valued based on comps similar to how single family homes are, so I’d start by looking at recent sales nearby (as close to the subject property and as recent as possible). It would also be helpful to know the average cap rate for the area, average unit price, average price per square foot, etc. for the particular submarket. A local realtor with experience in small MF should be able to help. I’d look up some recent sales of similar buildings and talk to the brokers who worked on those deals. You could also get an appraisal. Nobody on here will be able to give you a number without knowing the exact property and without being an expert in that specific neighborhood. As others have mentioned, the seller certainly has a number in their mind, so asking them what they want for it is the obvious starting point (if you haven’t already). People usually have a good idea what their properties are worth, although they often want more than what an investor is hoping to pay, which is often the challenge that needs to be overcome with FSBOs. Good luck!

Steve K. · Answer

Location, location, location. I like to consider all the ways real estate makes money: rental income/cash flow, appreciation (forced and natural), tax benefits/depreciation, debt pay-down. My best returns have been on properties with a blend of all the above. I agree with what you say, that underwriting should be a blend of art and science essentially. The most important thing to me is the value-add component and being able to force appreciation, but that's just what fits me personally and everyone has their own strengths and strategies to compliment those strengths.

Jay Weiss · Answer

Steve K -

Thank you for your thoughtful answer.  It is helpful.  I have had preliminary conversation with two realtors, one investment property firm and one neighborhood specialist.  Those are ongoing.

Your note persuades me that the neighborhood doesn’t fit the usual patterns because it is small relatively speaking and the area has had a very high level of SFH activity in the last few years.  SFH prices went up 18% last year, 6% the year before, and above average returns before that. Comps from a few years ago are of marginal value.  Plus there have been no 4 - 4+ unit buildings sold in the last six years.  There aren’t many of those in any case.

The are a couple of residences with 1-2 units “upstairs” that have sold at square foot prices that would put the present property well above $1 million.  But the present building isn’t set up for a large owner space.

There is one particular issue that I have discussed a great deal with the realtors.  I’d be interested in your thoughts.  Assume that at the end of the first full year, the buyer of the present property received $75,000 in gross rent and the property appreciated in value by $50,000.  The total return in gross value is $125,000.   The down payment on a 30 year loan was, let’s assume, $250,000.   I like that result and I look for buildings with bright futures.

Let me quickly add that I understand the basic stuff - real estate values can go up and down and there are expenses and risks related to generating the rent, etc., etc., etc. I have a good deal of experience with all of that.   In general, though, I have a decided preference for rental properties with strong inherent value.  So I look for properties like the present one, and I would walk away from a property that exceeded the 1% rule but was located between Four Seasons Total Landscaping and the crematorium.

I wonder what you look for to identify properties with strong inherent value.   I am prepared to accept that the process is a product of judgement and experience and not a formula.

Jay Weiss · Answer

Schiller-Davis index says $1,200,000, +/- 7%.  I think that is about right.

Bill B. · Answer

Seven dollars. But a local realtor would probably have a better idea. You’ll pry need more info than SF and what quarter of the country it’s in. Certainly the seller has a number in mind otherwise just offer 1/2 of what Zillow says it’s worth with an inspection contingency.

Lynnette E. · Answer

seven million

How would you price this sale?

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