Quad to 6-plex: repositioning valuation

[Mark Doty]

I have a hypothetical question for the community about purchasing a 4-plex that has been zoned for 2 additional units.This is a hypothetical exercise to identify gaps and valuations not currently under consideration.Feedback is appreciated!

The existing quad is listed for sale at $1.1M and a 5.3% CAP.Commercial multifamily in the area sells at a CAP rate of roughly 4.5%.The existing property is zoned to allow for 6 units and has available land to build an addition duplex for ~$150 per sqft.Assume 1000 sqft duplex at $150,000 and we'll build that into the loan.After expenses, the additional units will each increase the annual NOI by $14,400 = (Gross rent – operating expenses = $600x12x2).

Purchase Price  $1.1MM

Construction:  $150K

Loan amount: $1MM

Total for project:  $1.25MM

20% down: $250K

Pre-construction NOI: $58,300

Post construction NOI: $72,700

What is the estimated property value after construction?

• A.$1,615,555 = The post construction property value is $72,700 (NOI) / .0045 (Comp CAP Rate 4.5%)
• B.$1,371,698 = Post construction = NOI $72,700 / purchased CAP rate of 5.3%
• C.None of the above, but please explain