The Multifamily Lightbulb

[Ryan Wydler]

In the Museum District of Richmond Va I've found a multifamily (4 units) property on a good size lot for that area that has a back ally access with a good size back yard and no garage like most of the neighbors have.

Please some one well versed in Commercial properties and multifamily tell me if I'm on the right track with this line of thinking..

My approach is to buy the property using A conventional residential financing and build a garage with an upstairs apartment, making the grand total number of units on the property a fabulous Five.. which is infinitely more in the eyes of Lenders because a 5 unit property is considered a Commercial Space. Thus the income of the property determines the value. Here's what I think I can do

Purchase Price - $675,000

Cost to build 5th unit $70,000

projected:

average income of each unit - $1,100

gross monthly income - $5,500

annual gross income - $66,000

NOI (assuming 50% Rule) - $33,000

At a 4.0% Cap I can presumably refinance out all of the "Original Money"and into a Commercial Loan... Right?

What am I missing on this analysis? Is Multifamily really that simple and awesome? That I can control the value of the asset solely based on the income it provides and the Cap Rate? But that leads to some questions on Cap Rate..

Who "sets" the cap rate for an area?? What Cap rates are expected in that area? I know the formula for a Cap rate and I understand how they are used to value and compare multifamily assets but how can I expect a Cap rate to change over time? It must be specific to markets but how does it change with economic climate?