Which is more valuable? 1700sf SFH or 1700sf Multi?

Question

Hello BPers,

I'm looking for general opinions at this point.  I came across a property that is pretty odd configuration and I'm trying to get a rough idea of its worth.

It is a small 2bd/1ba SFH.  In addition, there are three efficiencies on the same property.  So four units all together, but they are all separate buildings.  The efficiencies look like mini houses.  If I didn't know better and just looked at them from the outside, I would have thought they were fancy, insulated storage sheds.  Each of them does have a kitchen and one bath.

And, while I know SFHs and Multis are a bit different animals, I was wondering if the total square footage would be worth more in a SFH or in a Multi?  Or is it too much apples and oranges to compare?

I looked at asking prices for two nearby duplexes and one was selling at $57/sf and the other at $77/sf.  I also looked at SFHs and most of them were also selling in the $55-$75/sf range.  The asking price for the property I am looking at is $88/sf, which just seems high for the area...or is it only the cash flow that matters for a multi?  Per the rental analysis tool on this site, it would cash flow at about $700/month after all expenses (including PM, vacay, maint., ins., estimated payments to seller etc.) and the current asking price is $150,000

I guess my thinking is this property should sell for a lesser amount per sq ft, since the potential buyer pool for it would be substantially less than a SFH or even a duplex.  While I would be a buy/hold investor, I think it would be a hard sell for whenever I might want to sell it.  Only other investors would be interested and I doubt it is eligible for conventional financing because I suspect it is too unusual for a formal appraisal.  She is offering seller financing with 10% down.  No details yet, other than that.

I'm pretty newbie-ish, and I'm sure made huge mistakes in my jumps of logic.  So, let me have it!

If nothing else, I feel like analyzing and giving a lot of thought to the pros and cons of an unusual property has gotten my juices flowing and my brain working!

Jesse T. · Answer

Are you factoring in repairs/cap expense/vacancies/management with the 550/month number?

How much of the property would you be financing?

At what purchase price would the numbers look good to you?  Or are the utilities and insurance too much of a drag on the income?

Jennifer T. · Answer

Yes, I factored in all of those expenses.  The units all look to be in really good condition and the kitchen appliances are all included.  At the bottom of this post, I copied what the BP Rental Calc Analysis spit out for me.  I also added in the percentages I fed to the analyzer.

If I were to buy the property, I would initially try to self manage.  But definitely wanted to include the PM fee in my number crunching, since I could very well see going this route eventually.

However, with all that said, I do think the utilities and insurance are too much of a drag on the income.  Even if she cut the sales price a good bit, I think it would just be a bit too daunting and risky for a more newish REIer like myself for the cash flow involved.

The property would be seller financed with 10% down (cash).  The remaining portion financed would be $135,000.  This part I estimated at a 6% rate, because it hasn't been discussed yet.

In a nutshell:

Monthly rental income:                      $3220

Expenses (not including loan):         - $1868

Estimated monthly loan pmt:          -  $809

Cash Flow:                                    $543

Vacancy (10%):

$322.00

Repairs (5%):

$161.00

CapEx (5%):

$161.00

Electricity:

$445.00

Water:

$75.00

Garbage:

$56.00

Insurance:

$230.00

Management (10%):

$322.00

P&I:

$809.39

Property Taxes:

$95.58

Jennifer T. · Answer

@Jesse T., I'm assuming the units are legal, but it is definitely something I would have definitely verified before proceeding.  Possibly subdividing is thinking outside the box!

@Brant Richardson, Thanks for the feedback.

But I want it both ways!  A property that prices similar to a more typical SFH and has a killer ROI.  Darn you for bursting my bubble ;).

The owner says she can find renters within 1-2 weeks of a vacancy (for what that is worth) and all the units are currently rented.  It does seem like a prime area for efficiencies.  The property is in Pascagoula, MS, which is a little Gulf Coast beach town where around 10% of the population is stationed at the Naval Base there.

The gross rental income is a bit over $38K, which is what initially really caught my eye!  But as I've delved further, the expenses are really high.  Insurance is crazy high on the Gulf Coast.  Utilities are included in all the rents, because there are no separate meters.  In fact, I had estimated the utilities too low, but received real numbers from the owner last night and now it looks like my monthly cash flow would drop to $550/month.

Still not bad, but not for me.  I was already borderline and, at this point, I could cash flow better in my own backyard (NOLA) instead of 2 1/2 hours away.  Ironically, the whole reason I am not looking in NOLA is to avoid the high insurance rates, but the gross rental income listed was initially so tempting.

Brant Richardson · Answer

I wouldn't really care about the $/sf.  To me it would be all about the rent to purchase price ratio or the ROI.  If you can actually keep those tiny units rented (they'd rent no problem where I live) then the property would be worth far more as a multi than a SFH.

Jesse T. · Answer

Are the other buildings legal units?

If they are it probably should be valued as a multi-family property since it will appeal primarily to investors.

Is subdividing a potential option?  I wouldn't buy assuming this was an option, but it could be a very lucrative bonus if it was possible.