I do not understand valuations for small multi-family properties in my market.

OP

Member since 2023 · 12 posts · 5 votes

Quote from @Bjorn Ahlblad:

You are not missing anything........most markets are the same. You did not mention high cost of money, crazy insurance rates, laws favoring tenants not land lords. And local ordinances shutting down short term rentals.

Don't forget 'best time to buy was yesterday, second best is today'! Have a good one!

Ok, maybe I'm not stuck in analysis paralysis.

I like your quote at the bottom!

Don't forget 'best time to buy was yesterday, second best is today'!

Don't forget 'best time to buy was yesterday, second best is today'!

Zachary Ware

Member since 2022 · 405 posts · 455 votes

You also have a lot of people house hacking where their main goal is to pay less than they would to rent or buy, not necessarily make a high return of cashflow.

4 Reply

Bill B.

Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes

People who want to try STR/MTR in a pretty safe way. People house hacking. People who own neighboring properties and want to control comps and stop a lazy landlord from degrading the area. They have too much idle money. And people doing a 1031 exchange up from an appreciated property saving $100k+ in taxes.

2 Reply

Kevin S.

Member since 2024 · 400 posts · 240 votes

You are absolutely right. I am having the same dilemma in my state. Seems one has to come up with 30-35% down to break even with mortgage and expenses. The rent as well as the appreciation has run its course.

2 Reply

Evan Polaski

Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes

@Sam Young, you also have to understand that while in the commercial space, you can have emotions tied up, often time you are dealing with sophisticated buyers who understand all the expenses involved in running a property. Each group may see its own efficiencies, different cost of capital, etc, but even with varying operating capabilities and assumptions, they all tend to fall within a relatively narrow band.

In the small multi, you are often competing against completely naive buyers. As Bill noted, there is a lot broader set of motivations in these deals, and as such the price someone is willing to pay typically makes no sense to a fairly sophisticated buyer.

OP

Member since 2023 · 12 posts · 5 votes

Seeing these responses validates my assumptions. I believe that I have contemplated all of the reasons mentioned above at one time or the other. It has been a frustrating experience sitting on the sidelines with funds ready to go (at least I am getting a 5% return). I may have to pivot back to commercial deals as we are seeing sellers adjust pricing.

Alex Olson

Real Estate Broker · Kansas City Metro · Member since 2015 · 2k+ posts · 1k+ votes

Everyone in every market has $1mm to spend. I am exagerting, but only a bit. If you want low competition you should go in the $2-$5mm range here in KC. Syndicators don't compete well in this price range, just tarting out folks don't have the money. So you only compete against other investors that want to make money not house hack. Here in this market can easily do it by putting 25% down with a strong business plan and a great local lender.

Alecia LovelessPro Member

Member since 2019 · 3k+ posts · 2k+ votes

@Sam Young The only suggestion I have is to try to use some of your networking skills to connect with other owners of multi family properties and see if any of them might be interested in selling some of their properties off market.

My contractor also does snow plowing and lawn mowing as well as his contracting work for many other investors. He has been reaching out to the investors that he has “that relationship” with and asking around for me to see if any of them want to sell any of their properties.

I’ve now got a lead on an 11 unit deal and am working on getting my financing in place either for that one should it pan out or for the next ones that do become available.

Ryan KellyBusiness Member

Real Estate Broker · Austin, TX · Member since 2018 · 1k+ posts · 1k+ votes

[email protected]512-674-5478

@Sam Young residential real estate is not valued the same way as commercial. In commercial, it's purely about the NOI and upside potential. In residential real estate, it's valued on supply and demand plus what other properties sold for. Even duplexes and quadplex properties can be purchased by primary homeowners who don't purely look at spreadsheets. It's a hard period in the cycle to make a lot of small multifamily properties work purely on the NOI.

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Russell BrazilBusiness Member

Moderator

Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes

[email protected]301-893-4635 Podcast Guest on Show #192

Youre missing the part that other people are willing to pay more for the properties than you are.

2-4 unit properties are highly competitive with a huge buyer pool. Lots of buyers, plus high demand equals high prices.

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OP

Member since 2023 · 12 posts · 5 votes

Quote from @Alecia Loveless:

@Sam Young The only suggestion I have is to try to use some of your networking skills to connect with other owners of multi family properties and see if any of them might be interested in selling some of their properties off market.

My contractor also does snow plowing and lawn mowing as well as his contracting work for many other investors. He has been reaching out to the investors that he has “that relationship” with and asking around for me to see if any of them want to sell any of their properties.

I’ve now got a lead on an 11 unit deal and am working on getting my financing in place either for that one should it pan out or for the next ones that do become available.

Good suggestions. Thank you. Good luck with your 11 unit deal.

Austin Steed

Real Estate Agent · Columbus, OH · Member since 2016 · 593 posts · 664 votes

Quote from @Sam Young:

I am a 25 year vet of commercial real estate brokerage. I have focused on investment sales my entire career, primarily stabilized income producing properties. I acquired my first MF property in 2019 (a four plex) in a 1031 exchange for around a 7% cap rate. I would like to acquire more small MF properties in the $600k to $1.5 million range as I trade out of partnerships in commercial properties. I cannot make any sense of the pricing that people are asking for MF properties in my market. Asking prices for duplexes in the areas that I am interested in run $750k and up. The only way for them to cash flow is run a AirBnB model. Even looking at it for an AirBnB, you have to aggressively underwrite (hope and wish) them to make sense from a cash flow perspective. Forgetting about cash flow for a moment, I cannot justify the pricing even if value appreciation was my only goal. The problem I see with value appreciation is that the values for these properties had a huge value run in the 2019 to 2023 period. Properties on the market today where the asking price is in the high $700k to $900k range for a duplex that would bring rent of $4000-$4400/month for long term rentals. Many of these properties sold for 1/2 of the current asking prices 2 to 4 years ago. Prior to that, the values were relatively flat for years and years. I cant find where the upside is to buy these properties. The "lot value" or redevelopment value is maxed out, the rental income potential is maxed out for the near term or longer. Brokers selling these properties point to single family residential comps to justify the asking prices. Without historically low interest rates again or significant rental increases, what will drive the value of these assets? What am I missing in analyzing these properties?

On an owner occ side there's a driving factor of minimizing housing cost and living in a desirable neighborhood. This can outweigh an investors ROI so you have many doubles that don't make sense as pure investment.

To me it seems like the areas that are less desirable for owner occs have much greater returns because of this. I'm in Columbus OH, so just going off what I see here!

OP

Member since 2023 · 12 posts · 5 votes

Quote from @Russell Brazil:

Youre missing the part that other people are willing to pay more for the properties than you are.

2-4 unit properties are highly competitive with a huge buyer pool. Lots of buyers, plus high demand equals high price

No, I am not missing that part at all. In fact, its it the underlying question to my original post. "Why are people willing to pay more than I am?" However, it should be noted that there are several of these properties that are not selling. It would suggest that others have come to the same conclusion...overpriced.

Brian Kloft

Investor · Arizona & Oregon Coast · Member since 2023 · 128 posts · 113 votes

Increase the number of units you are looking at. Once you start getting around 4-5 units you start getting people looking at a cap rate for a purchase price. However even sometimes those don't make sense for various reasons. The best thing is to try and find your market where your competition is lower. In commercial terms, find those properties in the around a $1mil to just under it price point. Those are harder to get good financing so it keeps a lot of buyers out.