Understanding valuations of small multi-family - San Antonio, TX

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Understanding valuations of small multi-family - San Antonio, TX

Kyle Kieke
Specialist · New Braunfels, TX · Member since 2016 · 11 posts · 4 votes

OK Bigger Pockets,

First real post so here it goes...

I'm a rookie.  Completely new to real estate investing but I've spent the last couple of months listening to BP podcasts, attended some webinars, and getting in some reading when I can to help educate myself.   I'm still trying to determine my investing niche, however I'm extremely interested in small multi-family deals because I feel they're somewhat less risky than single family and have potential for better cash flow (if I'm wrong, someone please speak up).

So far I've been using open source websites to get to know this niche in San Antonio, TX (Realtor.com, Redfin, Loopnet, etc).   I realize that what I'm finding on these sites are not going to be the better deals that are out there, but my real question is that when I look up previously sold prices on some of these properties, I'm finding that most of these properties sold back when the market was beginning to come back (2010-2012), however they're selling for 75%-100% more today than when they were sold 5 years ago.  

I understand forced and natural appreciation, but honestly some of these properties still look like dumps.   Many others I look at I feel are overvalued from what they list the rent rolls at.   When I go to check rents, it seems that many of these properties aren't even pulling in the average rent for that zip code.   Is this the trend now?  To list markets for what their potential for rents can be?  I'm no expert but this doesn't make sense.   Again, I am new to this so there is a good chance I'm not even digesting all of the information correctly.   How does a guy like me look at a deal and know how much I can rent it for when analyzing a deal.

Until then, I'm going to keep drinking from the BP firehose and try to understand everything as best as I can.   If anyone out there in San Antonio is already a genius when it comes to the small multis, please let me know who you are, I would love to pick your brain about this stuff.

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Sam LLoyd
Investor · Wasilla, AK · Member since 2016 · 277 posts · 139 votes
9y

first thing first.  Don't believe anything a seller says without verifying it.  A seller is going to minimize expenses, exaggerate rents.... you need to do your own market analysis to find what rent is.... go on Craigslist or whatever is used in your area.... find 20 of the closest comps, and then figure that your subject property is below average.... don't forget to take into consideration the condition, the type of building, pets/no pets, location, length of lease... etc... this is something that will come easier with more experience, but I wouldn't take an 'average rent' from a website because there are too many factors.  I've also seen landlords put crummy tenants in so that they can ask a little more. 

Next, regarding the previous sale price.... we don't have those websites where I am, but I'd be real hesitant to use sale numbers since the deal isn't recorded... maybe it sold for more because there was owner financeing.  Maybe it sold for less because the buyer had to throw out bad tenants... too many things you don't know.  Look at what similar buildings sold for in the last 6 months, take that with a grain of salt because of the reasons I just stated, and then figure out what a building is worth.

When I'm looking at a building (and I'm looking at small multis right now), there are four things I look for, and in this order:

ROI. It doesn't matter if the seller is making a killing. If the price you can get it for gives you a good return on your money, then this is good.... I wan't 10% Cash on Cash, but I'll settle for more or less depending on other factors.

CAP rate. This is just a place to start. It's more effective the bigger the deal. However, with small multis, this is a flexible number to shoot for because it can be greatly affected by how well you manage tenants, or manage your manager. Look up on BP how to work CAP rates.

Money/Unit. Since I self-manage, I want $200 cash flow per unit. This is very hard to find in my area with the leverage I'm using, but it's a starting point. I'll go lower if my ROI is higher.

Opportunity to expand. I'm looking forward to the future: the last 4plex I bought has room for another 4plex on the lot and it is in a great location. When I feel confidant about the market... maybe 2 years from now, maybe 10.... I can build up that property and get a ton more out of it. Like all the other factors, I can be flexible about this if ROI and/or cash/unit are high enough.

I hope these thoughts help... let me know if you have any more specific questions.

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  • Sam LLoyd
    Investor · Wasilla, AK · Member since 2016 · 277 posts · 139 votes
    9y

    first thing first.  Don't believe anything a seller says without verifying it.  A seller is going to minimize expenses, exaggerate rents.... you need to do your own market analysis to find what rent is.... go on Craigslist or whatever is used in your area.... find 20 of the closest comps, and then figure that your subject property is below average.... don't forget to take into consideration the condition, the type of building, pets/no pets, location, length of lease... etc... this is something that will come easier with more experience, but I wouldn't take an 'average rent' from a website because there are too many factors.  I've also seen landlords put crummy tenants in so that they can ask a little more. 

    Next, regarding the previous sale price.... we don't have those websites where I am, but I'd be real hesitant to use sale numbers since the deal isn't recorded... maybe it sold for more because there was owner financeing.  Maybe it sold for less because the buyer had to throw out bad tenants... too many things you don't know.  Look at what similar buildings sold for in the last 6 months, take that with a grain of salt because of the reasons I just stated, and then figure out what a building is worth.

    When I'm looking at a building (and I'm looking at small multis right now), there are four things I look for, and in this order:

    ROI. It doesn't matter if the seller is making a killing. If the price you can get it for gives you a good return on your money, then this is good.... I wan't 10% Cash on Cash, but I'll settle for more or less depending on other factors.

    CAP rate. This is just a place to start. It's more effective the bigger the deal. However, with small multis, this is a flexible number to shoot for because it can be greatly affected by how well you manage tenants, or manage your manager. Look up on BP how to work CAP rates.

    Money/Unit. Since I self-manage, I want $200 cash flow per unit. This is very hard to find in my area with the leverage I'm using, but it's a starting point. I'll go lower if my ROI is higher.

    Opportunity to expand. I'm looking forward to the future: the last 4plex I bought has room for another 4plex on the lot and it is in a great location. When I feel confidant about the market... maybe 2 years from now, maybe 10.... I can build up that property and get a ton more out of it. Like all the other factors, I can be flexible about this if ROI and/or cash/unit are high enough.

    I hope these thoughts help... let me know if you have any more specific questions.

    4Reply
  • Ramon Cuevas
    Liberty Hill, TX · Member since 2016 · 85 posts · 96 votes
    9y

    Welcome to BP @Kyle Kieke. I am also a newbie investor looking to get started in small multi-family investing. I agree with you on the less risk part and also love the idea of forced appreciation by increasing rents and lowering operating expenses instead of just market appreciation. I have used rentometer to get average rents for a particular area but I think the best advice would be to reach out to a few property managers in those areas that you are looking to invest in and build some relationships. You can also reach out to the commercial brokers on LoopNet that have the most listings in San Antonio and do the same thing, I prefer the PM idea since they don't have any incentive to sell you anything.

    I am going to follow the discussion and see what other good advice you get from the experts here on BP.

    Good luck1

    1Reply
  • Betty Cruz
    San Antonio, TX · Member since 2016 · 240 posts · 163 votes
    9y

    @Kyle Kieke I'm with you. I'm interested in multi family and can see a lot of upside.  I have an offer on one right now that I'm very interested in. Message me if you want to discuss and compare notes. 

    2Reply
  • Ross K.
    Investor · Boerne, TX · Member since 2014 · 54 posts · 25 votes
    9y

    a couple thoughts:

    - rentometer is good for average rents, but it doesn't give you price per sqft (maybe the paid version does). That's a starting point, but if you're looking at properties in nice areas of town, and thus higher rents, many of those renters have agents, so check for comps on the MLS too. I look at both.

    - valuation is different for different people. Yes, prices in San Antonio are higher than they were a few years ago. Your question about potential rent vs actual rent is a good one. I think people are tending to price based on potential rent these days, now that the forced appreciation concept is more widely understood. Maybe those prior sales are based on actual rents. Keep in mind to get those potential rents, some rehab will likely be needed. I have two duplexes here in SATX, both are forced appreciation/BRRRR properties, with a third under contract. But I didn't buy at potential rent valuation, I bought at actual rent valuation, knowing I can get more out of the property.

    Just my two cents. 

    Ross

    2Reply
  • Brad LarsenPro Member
    Property Manager · San Antonio and Austin, TX · Member since 2016 · 377 posts · 380 votes
    9y

    @Kyle Kieke  Good Morning Kyle - In reading the posts, I have to wonder why you are so focused on the multi-family real estate side for properties to invest in.  Let me offer a few reasons to consider single family homes as your FIRST choice.

    1) The monopoly method.  Buy, hold, sell 3-4 single family homes....years later sell....exchange in a 1031 to buy a nice multi-family or commercial building.  Nothing new with this - but it holds true.  

    2) You get what you pay for.  If you buy an investment for multi-family where rents are $500, you get the absolute worst kind of tenants / applicants and you then just bought yourself a full time job.  Good property management companies can not handle MF properties like this because the tenants do not come to us ready to be screened, verified, and held to actually pay rent on time!

    3) The re-sale market for a SFH is exponentially larger than a MF property. Who buys MF properties? Investors. 1 out of 100 people. Who buys SFH properties? Everyone.

    4) Appreciation. In my opinion, you will see a greater appreciation in SFH versus MF. Of course there are exceptions - but I think it plays back into point 3.

    5) Comparable Rents. When looking for comparable homes, you can get quite a bit of information for SFH's through the MLS or other sources. These tend to hold more water than some Pro-Formas or Loopnet listings coming from the seller.

    6) The Formula. We feel that San Antonio is excellent in producing good quality investment SFH's in the $125k to $175k range that fall closely to the 1% rule in rents - get excellent tenants - are newer in age - and can sell when you need them to. Did I mention excellent tenants? Go for homes that will rent for $1,000 or more per month. The quality of tenant is much better. I can not stress this enough. If you "cash flow" well from a MF home - but it costs you 3 times the amount to turn the unit because the tenants only have $500 deposit down.

    Lastly - the BRRRR method is an excellent way to begin. You could get your feet in the door with a SFH with a primary residence loan.

    Always work with a Realtor, and plan on hiring a property manager to handle your home.  

    Good luck out there!

    2Reply
  • Ramon Cuevas
    Liberty Hill, TX · Member since 2016 · 85 posts · 96 votes
    9y

    @Brad Larsen You make some excellent points on your post but I disagree with a few. There are a lot of blogs here on BP as to why multifamily is a better investment compared to single family. In my opinion, some of the main reasons why I would prefer to invest in a multifamily are economy of scale, easier and cheaper to manage and you have more control over value, just to name a few. The SFH value is market dependent and if the house is vacant you have $0 cash flow. In regards to comparable rents, you definitely have to do your due diligence and verify all the information coming from the seller and build relationships with local property managers in the area who know the market rents really well. I do agree that for your FIRST investment unless you already know what you are doing the SFH and the BRRRR method are excellent ways to begin but if you are going that route why not use the FHA loan on a small 2-4 unit and house hack to get your foot in the door?

    3Reply
  • Brad LarsenPro Member
    Property Manager · San Antonio and Austin, TX · Member since 2016 · 377 posts · 380 votes
    9y

    @Ramon Cuevas  I would agree with you as well on the MF being possibly better than a SFH if one has the capital and experience to purchase a newer 50+ unit complex getting rents of $1,000 or more per month. However, the focus of my post was to assist the rookie investor who does not have $1M in liquid funds to put 20% down on a $5M complex.

    That aside - it comes down to quality of tenant. My firm and I have leased well over 1500 SFH's in the San Antonio region (documented on the San Antonio MLS) so my experience in dealing with tenants has taught me that THEY make the difference in the performance of the project as a whole.

    You are right on scaling, managing, all of the above if that is your focus for MF....which falls victim to exactly what you indicated in your reply the same as SFH's. Again, my response was for the self-proclaimed rookie's initial post.

    Lastly, I could not comment on using a FHA or a VA loan to house hack. That is up to the person borrowing the money and interpreting the use of those funds. Example: You are supposed to live in a VA home as a primary resident - but after closing....plans change and you rent it out. I have seen that done but would not recommend or condone the practice on this forum.

    Good luck out there!

    1Reply
  • Kyle Kieke
    OP
    Specialist · New Braunfels, TX · Member since 2016 · 11 posts · 4 votes
    9y

    Good morning everyone.

    Thank you to everyone who took the time to reply to my post, really appreciate it.  Just adds to my confidence that BP is a real community filled with real people looking to help others.   Great comments and advice from everyone in here.   Apologize for disappearing for the past couple days, but Christmas was pretty busy for my family.   I'll be on vacation for the rest of this week with no internet access (actually looking forward to that one), but I'll be back after the 1st of the year.

    @Sam LLoyd

    - Great point about not believing what the seller is trying to sell.   That is a reoccurring theme that I hear time and time again.   I need to get better at doing my own analysis when looking at these deals and I'll admit, my first barometer is usually rent-o-meter just to get a quick overview of what the area rents are going for, but even then I feel that rent-o-meter is giving inflated numbers.  I know my city fairly well and have a hard time believing some of the numbers I'm seeing.

    - As far as checking sales prices, again, I have a hard time believing what I find on the open internet from all the websites like Zillow, etc.   In my own neighborhood I'm much more confident in the sales numbers, but getting into other parts of town it seems like these websites are pushing out bad "guesses".   I haven't started working with an investor-friendly realtor, but would like to sit down with some if they'd spare the time.   I'm going to write a "San Antonio Investor Dream Team" post to see if I can get some referrals for realtors, CPAs, property managers, attorneys, etc. because I need every one of these for my team.

    - ROI is obviously important and I'm playing pretty conservatively right now on the few deals I've looked at. I also want $200 cash flow per unit as my goal getting into the deal, but don't mind if I have to perform some forced appreciation to get there as I'm going to be a long-term buy/hold investor.

    Thanks again for responding and good luck in 2017.

    - Kyle

    0Reply
  • Kyle Kieke
    OP
    Specialist · New Braunfels, TX · Member since 2016 · 11 posts · 4 votes
    9y

    @Ramon Cuevas

    Thanks for responding Ramon.   I'll actually be in Liberty Hill for New Year's as it's my buddy's birthday and we're going to be staying at his place, small world.

    - I've been reading/hearing about other investors finding good brokers on LoopNet as a way to get to their better deals.   I also agree with you that a property manager would likely give you better information concerning the rents because they aren't trying to sell you the property.

    - Are you looking for deals in San Antonio?   I know you're further north than I am but I'm considering the Austin area for deals as well since the drive isn't that far.   I also have a ton of work in Houston as my day job takes me there every week so I'd consider just about anything in between.

    Good luck in 2017

    - Kyle

    0Reply
  • Kyle Kieke
    OP
    Specialist · New Braunfels, TX · Member since 2016 · 11 posts · 4 votes
    9y

    @Ross K.

    Ross,

    I've been looking in the blue collar areas of San Antonio right now.   Inside 1604, mainly in from the NW side (Bandera Rd) over to the NE side (Converse/Selma/Universal City).   I don't want to compete in the higher end areas of town mainly because of the cost associated, but I'll snag a deal there if I can take one.

    - I like your point on valuation being different for different people as I've seen this in the commercial construction world for my day job. I was actually listening to BP podcast 206 yesterday and the guest stated that "If you're not embarrassed by your offer, it's too high." That really stuck with me, and I'm only going to get into something if my numbers work on the deal and I'm figuring very conservatively. I too am looking for BRRRR opportunities for my entry point into investing. I've talked to a few colleagues about flipping, but right now I don't believe that is a good fit for me.

    By the way, I work in Boerne.  I'd be very interested in talking with you about your experiences with your duplexes that you've purchased and how those deals are working out for you.   If you'd be willing to sit down for lunch sometime in the next couple of weeks please PM me.   I really want to connect with more people locally when possible.   You've obviously been doing this longer than I have, but if there is anything I could do to help you out let me know.

    Good luck in 2017

    - Kyle

    0Reply
  • Kyle Kieke
    OP
    Specialist · New Braunfels, TX · Member since 2016 · 11 posts · 4 votes
    9y

    @Brad Larsen

    Brad,

    Appreciate your insight as a property manager on my forum post.   Really agree with you on your points about having quality tenants.  I've actually read up on your company somewhat before you posted on here so I think it's pretty cool you reached out and responded to my post.

    - I'm considering house-hacking for my first MF deal and have slowly been trying to win my wife's vote on this. It's a process, but she understands the benefits of this method and knows that it would be a short term deal for us to live there. I am a veteran and am aware that the VA benefits do scale up when buying a MF property which would likely be the route I choose to finance the deal.

    - You're right about the part on me not having $1M to put down on a $5M complex.   I understand that investing is a process that takes a lot of time to build up your portfolio, but one day I will buy a $5M complex, just won't be today.

    - I haven't ruled out SFRs at all, and the $125K-$175K range is what I believe to be a great place to invest as they're more easily affordable which means a wider pool of potential tenants.  If I can get deals on SFRs that net me $200 per month cash flow then I'll look at them.   The long term appreciation play would just be another way to leverage for more deals.

    I know you're busy running a property management company and I'm not sure how many new investors come knocking on your door, but I would be open to discussing this further with you in the future.  I'm not looking to waste anyone's time, just looking for some genuine insight into this business.

    Good luck in 2017

    - Kyle

    2Reply
  • Ramon Cuevas
    Liberty Hill, TX · Member since 2016 · 85 posts · 96 votes
    9y

    @Kyle Kieke I love Liberty Hill, we had been driving around here for about a year looking to buy something before we sold our house in Cedar Park last year. City is looking to revamp the downtown area and I have seen a lot of growth here over the last few months.

    I have not looked at anything in San Antonio but have heard from a few different individuals that the rental market is great and there is a lot of cash flow.

    0Reply
  • Kyle Kieke
    OP
    Specialist · New Braunfels, TX · Member since 2016 · 11 posts · 4 votes
    9y

    @Ramon Cuevas

    San Antonio has always had a pretty solid real estate market.   I'm trying to learn the rental side of the market as my previous experience was in new residential construction and now commercial construction.

    From what I've seen, the 183 corridor keeps growing north.   I noticed several new neighborhoods along 29 and 183 when I was up there this past weekend.

    0Reply
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