How is a single family home portfolio valued for cash out refi?

[Steven Barr]

Trying to wrap my hands around this theory….

Let’s say I buy a home in the Midwest - a duplex for 75k. I rent each side out for $800/mo.

Now let’s say I do that 10 more times. I have 10 duplexes that I bought for $75k each and have $800/mo per unit. 

My gross income is $192k/yr. Assume 40% for expenses and my NOI is about $115k/yr.

Well I paid $750,000 for these 10 homes that I bought individually. Assume I put 20% down on them and I want to do a cashout refinance with a commerical loan. Multifamily is based on income and not comps. If the area is 10% cap rate, then my 10 homes are now suddenly worth $1,150,000 (115,000/.10). That means I raised the value of each home by $40,000 just by simply putting renters in them.

Seems far fetched that a lender would just come in and say “hey I know you bought these for $75k each just 3 months ago, but I’m gonna give you a loan valuing them all at $115k now”

Is this truly how it works, or is there gonna be some hiccups because this is still single family residences and not true apartment complexes?

Thanks guys!

[JD Martin]

Quote from @Steven Barr:

Quote from @Bill B.:

What if your market is more likely a 6% cap? Did you just lose 30k per property? Luckily for SFR and small multi sellers, this isn't how it works

Any residential rental property with 4 or less units is considered non-commercial. That means their value is determined by similar sales. You want to know the value? Look at the 4 or 5 closest nearly identical sales and get an average, that’s about what they are worth. And you can probably borrow 75% of that. 

You have 2 paths. Get as much cash out from a few of them as you can to pay off a couple loans and get back under 10. The “smarter” plan (imho) would be to do a 1031 exchange of at least 4 of them for 1 nicer property. (It could be a 5+ commercial unit you might not qualify for or 4plexes in better neighborhoods, or whatever.). This gives you 3 more “cheap” loans, hopefully better tenants with less turnover and maintenance.

You want to end up with 10 x $400k+ loans ($4million), not $750k total. I guess my easiest example was if you imagine you h to get a separate loan for each side of your duplex. So you have 10 x $37k loans and you were asking what to do next. I'd suggest you sell half and by buildings with 2+ units in each building, or a SFR that's worth as much as 4 of them.

Good luck. 

@Bill B. if it was a 6 cap then that would increase the portfolio, not decrease it. It’s now worth $1,916,000 (115,000/.06)

But if these aren't valued based on NOI, why do I see single family home portfolios for sale on places like crexi and loopnet whose values are based on income, not comps?

 Why? Because they are trying to swap numbers to get a better sales price.