All Forum Posts by: Account Closed

Hello @Austin Petrie, 

Everyone has mentioned some great resources. One additional one I can mention is market reports issued by firms such as CBRE. CBRE issues their report bi-annually and it is broken down by class and MSA. The report includes both CAP and ROC (for value add opportunities). It also has appendices showing definitions, example calculations, and additional information.

If you are having trouble finding it PM me and I can shoot it over to you. 

Goodluck!

- JA

Wow, I'm glad I clicked "follow" on this thread ;)

Hey @Jacob R. Crosby, 

By value add, I mean increasing the Net Operating Income of the property. Multifamily properties (5+ units) are valuated based on the income they produce. If you can find a property that is undervalued (i.e. the NOI can be increased in some way), then you will both increase your cash flow and increase the value of the property when it sells. A value add play would help hedge against some of the market risk, but keep in mind that an aggressive renovation plan also carries risk.

Take the comment from  @Sam Grooms as an example. If you find a property where the rents are below the market comparable prices you have a value add opportunity. The next step would be to determine what it would take to raise the rents, and wheter it fits your target investment criteria. 

I guess, I would also mention that it is not particularly easy to find a value add play either (I apologize if my prior comment made it seem that way). The market is competitve right now. 

- JA

Hey @Jacob R. Crosby,

I totally understand that you want to keep your capital deployed and growing. With all that said, I personally am still bullish on multifamily, but I think it is time for caution. 

No one knows what will happen over the next few years, but can certainly use information that is available today to gauge what market risks your strategy may be exposed too. As @Tyler Kastelberg mentioned, spreads are very low. With interest rates continuing to rise, it may be reasonable to expect stabilized cap rates to increase a bit as well. In other words, if investors cannot get debt as cheap in the future, they may find it harder to pay such high prices (this is, of course, an over-generalization and does not take some of the finer points about loan assumption). Put simply, strategies that are very over leveraged may not be the best option on a risk adjusted basis.  

I am personally focusing on investments that either have a larger percentage cash flow (which are less likely to find) or a value add component that can hedge some of the exit risk. 

But, who knows, in 3 years we will probably all be wrong. 

- JA

Hey Chai, 

Everyone has a different opinion on this particular subject, but I think @Tyler Kastelberg hit the nail on the head. 

There are certainly good calculators out there (some paid, some free), but if you do not know how to properly use them it is irrelevant. You could buy a $10K program with all the bells and whistles, but if you cannot interpret the various metrics, and understand how they might apply to your particular business model then you will set yourself up for failure. Just my $0.02.

I would also recommend underwriting deals yourself. If you are anything like me, you will eventually have a list of questions. My strategy was to talk to as many investors that I could to learn how they thought about certain things. Many people on this site have been more than willing to help. BP is a great resource. 

If you do choose to walk down this path and run into questions feel free to PM me. 

- JA

There is no crystal ball with investing... I suppose that's what can make it so hard. We have to take in the best information that we have now and try to navigate the waters over the investment horizon. 

Personally, I think Dallas is a little overheated, but that is a view of the broader market. There can always be diamonds out there you just have to find them. Know your numbers well and make sure you are conservative in your underwriting. Know where your business model is exposed and make plans to mitigate that risk if something should happen. 

For instance, we know that the demographic data  still supports "bullishness" for the Dallas market. Dallas has a powerhouse economy beating national job growth by around 100bps, population growth is around 3 times the national average, it is a business friendly environment that attracts real talent, and it is a pretty affordable market relative to other similar locations in the nation. 

My take is that Dallas is certainly still a good market. 

But good markets attract more investors. Prices are creeping up, interest rates are creeping up, and rental growth is starting to face some headwinds nationally. During your underwriting make sure you are not being overly aggressive with factors related to these items (and other items you may find in your own research). 

Sounds like you have found an interesting opportunity. Let us (BP) know how we can help. This site is a great knowledge base. 

- JA

It sounds like you are speaking about a duplex. This will be valuated based on comparable homes in the area rather than strictly NOI (by the bank at least). You have the advantage of living in the area. Take a look at the comparable homes in your neighborhood and the neighborhoods nearby. What are they selling for and what do their interiors/exteriors look like? Do a cost/benefit and see what you might be able to get.

The other way to drive value (although not exit price) is to increase your rents to market. This will increase your cash-on-cash yield. I realize that your situation is different because you and your family live in the property.... but, if you or your sister ever decide to move out, you can do a similar comparable analysis on market rents. 

Hope this helps. Feel free to PM with any questions. 

- JA

Hello Samuel, 

A duplex will be valuated directly by comparable sold properties, not necessarily by NOI (as mentioned in my first post). From a lending perspective, anything 5+ units is considered a "commercial" property and is valuated on NOI. Anything below is valuated by looking at similar properties that are recently sold.

In your case, I would look for duplexes that were sold recently nearby. Get as many similar assets as possible. Average out a $/sqft and apply that to your target property. It always helps running things by your bank for an opinion as well. Keep in mind that if your market is similar to Houston, it is cooling off. Make sure you bake this into your numbers. 

All that said, it is possible to use the NOI approach to valuate the duplex if you are willing to look at it that way (I have seen this done before). I personally would not recommend it because you likely be overpaying for the property and will run into issues when securing a loan. It is also very unlikely you will get another investor to look at it that way when you exit the position.

- JA

In multifamily a very similar value add strategies are used. Multifamily properties are valuated based on the income that the property generates. If your renovations allow for higher rents (or possibly allow for sources of ancillary income), then the value of the property will increase proportionally. The neat part is that the value of the property will increase AND the cash flow will increase at the same time. That said, this works both ways. If you take over a multifamily property and somehow lower the Net Operating Income then you will destroy value and cash flow. 

As you begin digging into the commercial side of real asset investing, you will find that this method of valuation allows for more flexibility on the business strategy. I personally think it is pretty cool. Happy to help with any questions you may have. 

- JA

In my personal experience insurance can be extremely confusing. I am sure it varies from investor to investor, but I am personally least comfortable with estimating insurance costs than other finer points in a valuation (management fees, construction costs, maintenance costs, taxes, etc.). 

For larger assets, I would highly recommend finding a good insurance broker in the area (as others have mentioned). They will be able to help you pick out the best product for your business plan. Sometimes this is not obvious. 

For smaller assets, I have had better luck speaking with other local investors in similar asset classes. The law of attraction seems to work here... usually several refer the same few places. I can followup from there. 

Hope this helps a bit. 

- JA