Duplex/Fourplex Cap Rates in Dallas

[Kyle Brookshire]

Are cap rates as much a factor in valuations for smaller multifamily properties as they are for the larger commercial deals I'm used to seeing in the "day job"?  

I'm about to refi my first two duplex deals and I'm just curious what factors will go into the appraisal; is it based off income generation, or actual tangible improvements made to the property itself and the state of the current market.  

If cap rates, what numbers are ya'll seeing?

[Andrew Postell]

@Kyle Brookshire I saw you posted this here as well so just thought I would answer here too in case anyone searched for this subject.  Fannie/Freddie absolutely care about your assets but not in the same way as commercial loans do where the property is 95% of the transaction. Which is why it really comes down to what type of loan are you refinancing with?

Generally speaking there are 2 main types of loans for investors: “Conventional” and “Portfolio”

Conventional - I'll define these as loans that come from Fannie Mae and Freddie Mac (if you recognize those names). These loans are all 30 year fixed rate loans. They have the lowest rates we can find and since they are 30 year fixed...they allow us to cash flow better...which helps us qualify for other loans later. The draw back to these loans is that they are more paperwork heavy than the other "portfolio" types of loans....but if you have ever received a loan on your primary home, it's likely that you will go through the same type of paperwork here with conventional lending. Fannie/Freddie money = Fannie/Freddie rules. NOT the bank's own money. These loans are required to use "Sold Comparables" to evaluated the ARV on a property. Remember, it's not the bank's call here. So what do the comps show? And it has to be a true comp - a house with granite countertops and premium finishes is not a comp with a home that has "rent grade" finishes and laminate countertops. They mush be comparable.

Portfolio - I'll define these loans as loans that come from the bank's own "portfolio" of money. Sometimes referred to as "commercial" loans. These loans are a lot more flexible than "conventional" loans. Bank's money = Bank's rules. If they like you, then maybe they will lend to you. But since there is a limit to how much money the bank has access to....their rate will be higher...and usually a shorter term. The most common portfolio style loan in Texas is a 20 year adjustable rate loan. These loans are easier to get but the terms are different. Theses might use comps as mentioned above but most of them will go off of the rent rolls. Keep in mind that each lender will lend it's own money differently, and since there are over 8,000 lenders in the US...that means there are over 8,000 different portfolio loans.

Anyway, that's the basic choices you have when you are refinancing residential properties. Feel free to ask anything else if you need. Thanks!