How do you value small MF?

Question

I have a question for everyone.  How do you value small MF properties (1-4 units)?

When I look at these properties (the true duplexes, triplexes, and quadplexes - not a SFR that has been converted into a MF) I notice they get listed on the MLS or LoopNet (yes, I know - not the best place to find these deals) with prices more reflective of the local residential real estate prices (comparable prices per sq ft).  It can be difficult to make the numbers work when these MFs are priced based on a high $/sqft.

If you are evaluating a property, like a quadplex, are you looking more at the area's cap rate to figure it's worth?  I would think I should evaluate any MF (2+ units to 100+ units) the same - based on financials, and local cap rate and cash flow, etc. because they are one dimensional - they will always be a MF unit (compared to a SFR that could be a rental, sold to a family, converted into a MF property, used as an AirBnB type rental, etc).

I hope my question makes sense, and I appreciate any and all input.

Thanks

John Leavelle · Answer

Howdy @Matthew Ries

I value small multi's the same as SFR.  Based on recently sold comps and not based on income or Cap Rate.  Why?  Because that is how most Lenders will have them Appraised.  I don't necessarily agree with it, but, that's what we are stuck with.

The higher listing price and poor price to rent ratio is why I like using the BRRRR strategy.  I can buy distressed small multi family properties at significant discounts and force appreciation (and possibly rent rates). This makes them more cost effective.

Andrew Syrios · Answer

Appraisals use comps for these. I generally try to use both a comparative method with other similar small multifamily as well as looking at the cap rate and cash flow. Real estate valuation is as much art as it is science.

Jeff Kehl · Answer

@Matthew Ries I can see why you would ask this. The lower number of units the less people tend to treat it like an investment and more like they are just buying a house. Naturally this makes sense because less people actually treat the smaller properties like a business. Also many of them are listed by residential realtor that aren't used to valuing investments.

Couple things I would suggest. 1) Look at as many appraisals as you can and see how professionals value property. A lot of good knowledge to be garnered. 2) Evaluate properties several different ways to determine what it is truly worth. 3) Ignore what properties are priced for and offer on them based on their value to you as an investment.

A few things I like to look at regardless of whether I'm looking at a single unit or 100 units:

Rent per unit/price per unit. This is the same thing as the 2% or 1% rule. If you can buy a single family house for $50k and rent it for $1000/month it is likely a good deal. A 100 unit apartment building that you can buy for $50k/unit ($5 million) and rent for $1000/month ($100k/month gross rent) is even better because you get 100 at the same time.

Price/sq foot versus building cost/square foot. If the house above is 1000 sq feet and would cost $100/ sq foot all in to build new, buying it for $50k seems like a great deal if it has been maintained and is not functionally obsolescent. Same for the apartment.

What have similar properties sold for and where is the market trending?

Matthew Ries · Answer

@Todd Dexheimer Thanks!  I do like the "economies of scale" that larger MFs offer.  I agree with you on that range, because I plan to put PM in place.  The numbers work better for the additional expenses with more units, and the smaller 4plex MFs I'm finding, seem to only meet the numbers when self-managing.

Todd Dexheimer · Answer

@Matthew Ries try jumping up to the 8-20 unit range if you can. I find that once you get into that space and higher, properties are based on the income. During a down cycle 1-4 unit deals can work well.

Matthew Ries · Answer

@Salvatore Lentini

Thank you for the input.  I like how you phrased that - knowing the competition for this asset and that they might be willing to pay more (similar to the SFRs).

@Jeff Kehl

Really appreciate your thoughts Jeff, very insightful and helping me to approach thinking about MF from different angles.

I think I need to find the right commercial agent or find off market deals, because when I come up with a number for a smaller MF (well below the residential agent's listing price) they don't quite understand where I am coming from to develop this number and it's usually not well received :)

I like the idea of looking at rent:unit cost as well, its all about breaking MF down into smaller more digestible pieces.

Thanks guys

Salvatore Lentini · Answer

@Matthew Ries

I find small MFs tend to be overpriced.  Partly because you're competing with retail buyer/hackers (and they can afford to pay more because they're living there) and partly because there's a lot of competition from other investors looking to make the jump from SFR.  Once you get above 5 it becomes a little different because then it's commercial financing.  Once you get above 10 or so the competition thins out and the price becomes more based on the financials of the property and whatever area cap rates are.

How do you value small MF?

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