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

[Kyle Kieke]

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.

[Sam LLoyd]

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.