Value of Quadraplex?

Question

For the experienced multifamily investor:

Assuming all systems are good and there is little to no deferred maintenance what sort of value do you think a stabilized, brick skinned quadraplex with slanted roof would be worth in a solid "C+" area with shopping (WalMart, Kroger, etc) and public transportation within walking distance and major employment centers nearby?

These are the numbers:

Gross Cash Flows : $26,400

Net Operating Income $20,507 (after taxes, insurance, water, trash, and grounds). Fully occupied with a waiting list.

What questions/concerns come to mind?

John C. · Answer

Okay so we can do 138k/building which is an 11 cap at today's numbers. Before inspection. Including management willing to stay on for a short time and the possibility of a small 2nd.

If anyone is interested in working on this deal with me send me a private message.

John C. · Answer

@Joel Owens

Good points. Thanks for contributing. Just thinking out loud.

I agree with you that the comp sales vs. cash flow value doesn't make sense. Neither did investors coming in and buying up SFRs for 30k-50k after repairs that easily rent for $795-$995/month but that has been going on for several years now. Are investors paying full armchair investor pricing for investment property in your area again? I realize it is coming but it seems that good deals can still be had in Metro Atlanta without having to go into war zones. If you know where and how to look.

The bargain shopping days are over but it seems that historically commercial/multi-family lags behind residential so there may be substantial opportunity in this space. Certainly looks like it. I've talked to investors in the area that bought out of foreclosure for pennies on the dollar. They are not selling. Why should they? They are pulling out cash like an ATM machine while values catch up. So your comp sales are cash investors buying empty buildings needing repair out of foreclosure during the recession and holding for cash flow with no incentive to sell. I've seen an old pre-recession appraisal that pegs the buildings at 304k each or 2.7m for 9. Obviously the actual value is much much less at the moment but it's interesting information.  Could we get back close to those numbers once the dust settles?

We need the armchair investor to come back into the market. You know - the full time doctor who is looking for long-term buy and hold rental property for tax benefits and the 30 year paydown as much as income and value.

I may need a commercial broker to get more of an idea of market value (may be some off market comps or the like) but this area was devastated by mortgage fraud during the recession. Investors are still able to pick up properties for way under cash flow value. The rental market apparently just picked up substantially a few weeks ago. Makes sense with a) employment improving and b) normal summer changeover. The phone is truly ringing off the hook with a waiting list as discussed. 105% occupancy. Rental demand in this area is through the roof since it is close to major job centers, shopping, public transportation, and colleges/tech schools. This is a transitional area for folks trying to build up their reserves now that they are back on their feet. People are in this area because they are either a) stuck at this level or b) trying to save money/rebuild credit. This is not a "destination rental" like a condo across from Piedmont Park. :-)

I have access to all of the paperwork. Been drilling down into the numbers (Trailing Twelve). The water bill is all over the place in Dekalb. They bill every two months. On one bill the monthly cost will be $100/month and on the next one $350/mo. Dekalb County apparently don't have the staff to read monthly or even bi-monthly so they "guesstimate". Average seems to be around $250/month which is already baked into the financials. I can imagine a plumbing audit and some updating to low-flow may improve these numbers but market demand supports the tenant paying some portion if not all of their portion of the water bill going forward. A typical two bedroom apt should run about $50/month for water according to a manager I spoke with at Dekalb Water. These are at $250. Hmmm.

Is the cash flow really that insane? With $2200/month gross rents what do you feel net rents should be? Doesn't $1268/mo net on $2200/mo gross seem reasonable? Say it's $1100/mo net or 50% of gross. That would put the value per building at $132,000.00 or 1.188m for nine of them.

.

Joel Owens · Answer

First I wouldn't believe anything the seller says.

That NOI they are showing is insane and I would challenge their returns line by line especially saying they pay water for tenants.

The statement also about rents are deflated and could be increased more but there is a waiting list doesn't add up with a bunch of foreclosure comps you said were nearby. If the demand was that great you wouldn't have all these failed buildings. Something is amiss here.

John C. · Answer

Looks like we can make it a total of nine quadruplexes contiguous to each other with similar features and numbers. So 36 doors with a NOI of $137,043. Can be financed either as individual 1-4 units or commercial/multifamily since the buildings are side by side. This may help to get away from having to use foreclosures as comps? Thoughts about how that would effect the numbers if at all? There is a great deal of net cash flow to service the debt and multiple value plays.

Michael Wolffs · Answer

Can someone (a local broker maybe?) give you the cap rate for the same class of property in the area?  Then just do the math.

However, depending on the area, <5 unit buildings tend to value the same as SF houses.  If that's the case, can you (or a broker), derive a value from nearby comps?  For this, Zillow could be helpful (but probably not gospel.)

John C. · Answer

Ok. So let's take off another 20% for vacancy rate/credit loss, turnover costs, repairs, capex/reserves, mgmt fees.

GOI of $26,400-$5280 (20%) -$5893 = $15,227 NOI.

Currently landlord pays the water. This could be passed off to the tenant to increase net cash flows by about $3000/yr but since that has not been done yet it cannot be included in the calculations. Just a possible value play to consider. Either that or raise rents since demand is through the roof.

So income value about 150k minus any abnormal deferred maintenance/repair issues that come up during inspection? Comp sales are all bank owned vacant foreclosures which kick the comp value way down. Emerging market. Will a 1-4 unit conventional 30 year mortgage lender accept a value based on cash flows instead of comp sales these days? Thoughts?

Anthony Gayden · Answer

In Phoenix, probably around $150-200,000. In Tucson $180-230,000. In Kansas City $120-150,000.

Britt Abbey · Answer

Your NOI doesn't include vacancy rate, repairs, reserves, management fees (even if you're self managing, your time is worth something).

Obviously I can't speak for your local market.  In my area of upstate NY, I'd approximate 110k-130k.  From what I gather from other posters, in Milwaukee it'd be much lower.  Real estate is so localized, it's impossible to estimate without knowing the market.