Let's Talk About Multi-family Properties

[Deleted member 130081]

Good post, FC. And different strokes are we should be looking at and reporting, the way I see it. All the things you have said would inform an appraiser. I can just hear an old friend who was not an appraiser talking about what to pay for a unit and laughing at someone who paid more. Depends on where you are. And when.

Not crazy about the GRM but it is a good example of the approaches being very interdependent. When I took Income Cap Case Studies the second instructor was quite a character from NYC who talked about the rent rolls, the trials and tricks and arm-twisting of getting the rent rolls. (Maybe some people would know who I mean, sorry forgot his name. Bradley was the other instructor, nice man.) I got the impression that many investors in his market would use a quick reference like a GRM, but where I am from they sound more like you do, conditioning their comments on various factors, some of which apply in one case and not in the other. I discuss the rental situation in mine in depth because I do not like the form but then I do not do them for regular lenders.

Doing all the approaches needed for a credible result does not mean doing all the approaches every time. But it would mean thinking about it all. Cost here would just get you quizzical looks from investors.

Your right. I know I endorsed the direct sales comparison in my post, but it is also true the other indicators come into play as well. The GSE form is not bad, it has like seven (?) different ways to look at value which then, puts the appraiser into the mindset of the potential buyer. Yup, there are investors who have their formulas and they know what they want to offer on any property pretty much sight unseen. They invest from a position of financial power. Then there are people like me who are small fries, can't afford to make a "mistake" and would be damn fools to not look a property and the investment over nine ways and sideways. These two very different types of investors both purchase small income properties.

And, don't count out the single family. Just because we don't tend to run Income Approaches on them does not mean they aren't purchased as rentals in large quantities. Lots of investors love them and some buy them only. There are some markets where the primary buyers of single family are in fact investors!!! My first house was like that. Just sold it last year to the renters and still have nostalgic remorse. That thing was a little money maker but, it had too many capital improvements looming and as a small time investor who needs to maximize profits on every penny spent, traded it out for a duplex where I am getting a just slightly better deal. Had I been a bit more flush, I would have held on to that one forever.

$30k in, $750 a month out, taxes and insurance $2000 a year. I made it nice, so the renters stayed. I had two renters in 5 years and the last renters bought it from me. In a perfect year, not accounting for capital expense, I made 23% a year on my money. And, some investors would laugh at me, because I didn't finance it and make an even higher ratio against MY money. But if I did that, that actual dollar amount I'd get back from each property decreases, so I'd have to have more properties to put the same actual dollar amount in pocket. However, I would have had someone paying the property off for me, so in the long run... . See what I mean? It all depends on how you look at it and what your goals are, what your financial position is and what you intend on doing about that. Of course everyone has the same goal of making money, then when and how are different.

Anyone have markets where the sale prices of investment properties are more whack than the prices of single family? Well, there is a reason for that - lol. A single sale does not a market make and even with many sales, an appraisal might be best defined as a range and not a price.

So after that two cents and back to the OP, adjusting for a fireplace in a rental is pretty hilarious (downward maybe). I mean...who knows now...maybe that market in fact values a fireplace, maybe up north in the woods or something...lol...only the appraiser/reviewer can make that call. I can tell you 99% of landlords would look at a fireplace and say two words - fire hazard.

 

[Deleted member 130081]

Fcrecords, I think that you make some good points. I would add that if the appraiser has good market data for the sales approach, it is highly likely that the income approach data will be current and relevant. You will then see the income fall right on top of the sca mv indication. The sca comps will allow the appraiser to derive cap rates and potentially act as expense comps (at least op ex ratio indications).

That said, the market value is not driven by an individual investors model for a given property (appreciation, zero money down, rent growth, etc.). The market dictates what the value is, and if you really dig into it (I have to in nearly every appraisal) you will find that the price paid for a property is nearly the same for levered and unlevered buyers and is irrespective of the investors personal model. Simply, the market value of the property is not less because an investor is funding the deal as opposed to levering the deal. The ROE expectation is higher for levered investors, but that doesn't mean an equity investor won't accept a lower ROE on the same asset at the same price. In fact, if you look at most of the largest unlevered deals that have occurred over the past few years in the US, they set record highs for sale prices.

Okay, so that said. You all touched on the form reports. I am a commercial guy and have never completed a form report. If the income is more relevant, why would you not allow that to drive your sales comp selection, and ultimately your conclusion? Ucbruin has tried to pigeon hole everyone on this forum into definitive answers when there aren't any. YOU have to do the work. If you aren't getting paid enough fee to do it properly, then don't accept the assignment. Simply relying on the sca because the government told you to is not acceptable in my mind.....but again I'm a commercial guy.

Uhm...yea...I dunno about all that...

I agree with this part, there are no definitive answers.

I would elaborate, but I have already broken my own rules and engaged a bit more than I care too (bad habits die hard). Not enough to argue on this one - just too much variable.

 

[George Hatch]

The reporting format serves to communicate the process. The process isn't driven by the reporting format.

First, we appraise; and then we use the report to "sell" the reader on the merits of the process we used to arrive at our conclusions. That we sometimes have to work around the limitations of a fixed format that we don't control only underscores that point.

The primary strength of using a narrative format is that the appraiser has complete control of the structure, order and contents of the report. We can add or subtract or move the components around any way we need to in order to get the message across.

 

[TRESinc]

For me personally, I purchase per unit. I have a certain amount per unit I will pay and yes, the ability to command rent is a factor in that (money in/money out). Also a factor in that are capital improvements, both what needs to be done immediately and what the property is expected to need along the way. As far as bedrooms yes, there is a bit of a premium that can be commanded going from a 1 bedroom to 2, and again from a 2 to 3. However, I don't really like 1 bedrooms because they are harder to rent at a higher price and attract single people who have a harder time paying and I don't like 3 bedrooms because the small amount of extra rent goes out the door with the extra wear and tear from larger families. I don't really care about the total number of rooms, so long as a unit has an acceptable amount of space for tenants to do their thing. Larger properties are actually a turn-off, as it's just more sf to maintain and repair. The best deals are often the little ones. But all that's me.

interesting take. mine is a little different. first and foremost the property must rent for more than my mortgage, insurances, taxes and HOA fees (i am on the get rich slow system and want the passive income for retirement). i have been in the rental game for a long time and over the past 8 years or so i have sold off everything but 1 bedroom condos, and bought a few more. i prefer the simple road when it comes to income properties. if i only have 1br properties i can't legally rent to anyone with children over 2 (all my rentals are in the same city). while i have nothing against kids by nature they destroy everything, so that is a money saver. i am only responsible for items inside the paint (in a condo that is appliances and hvac), so if there is clog in a common drain or a common water line breaks i don't have to pay and the association insurance covers any damage i might incur. i don't have to worry about the tenants keeping up with exterior maintenance (grass, snow, etc). someone is always watching to see what is happening in the association, so it's like having a built-in security system. on top of that i am on the board at the two associations i own so i have a lot of valuable insight from that.

 

[Gobears81]

interesting take. mine is a little different. first and foremost the property must rent for more than my mortgage, insurances, taxes and HOA fees (i am on the get rich slow system and want the passive income for retirement). i have been in the rental game for a long time and over the past 8 years or so i have sold off everything but 1 bedroom condos, and bought a few more. i prefer the simple road when it comes to income properties. if i only have 1br properties i can't legally rent to anyone with children over 2 (all my rentals are in the same city). while i have nothing against kids by nature they destroy everything, so that is a money saver. i am only responsible for items inside the paint (in a condo that is appliances and hvac), so if there is clog in a common drain or a common water line breaks i don't have to pay and the association insurance covers any damage i might incur. i don't have to worry about the tenants keeping up with exterior maintenance (grass, snow, etc). someone is always watching to see what is happening in the association, so it's like having a built-in security system. on top of that i am on the board at the two associations i own so i have a lot of valuable insight from that.

That brings up a good point. There are some markets that I work where there is a surplus of 4 BR units. Quite a few campus properties are analyzed on a price per bedroom, but the vacancy rates on 4 BR are frequently higher due to the difficulties in matching roommates, as well as developers focusing too much on the value creation for each incremental bedroom. There is a reason why newly constructed apartments aren't all 3, 4, or 5 BR units, even as the construction cost per square foot goes down for larger units. Conversely, the 1 BR properties on campus are usually snatched up. When analyzing on a price per BR or per unit basis, I typically consider the rent differential as it is the most straightforward and comes with the assumption that 1 BR units rent for a similar occupancy as 2 BR units. But when it gets to 4 BR units, it is really better to consider NOI differentials (or at least effective gross income differentials), as the vacancy rates can be higher than smaller units.

 

[Terrel L. Shields]

Income approch given most weight regardless of seller/buyer???

Usually the case here

sure we've all appraised 2-4 units where the owner doesn't increase the rents or keeps them below "market" because he likes his tenants

The question is will this long term renter be paying enough and enough less trouble to offset the common 10% vacancy one has to tolerate and the frequent clean up costs related to a new tenant. I know one that is cheap but the renter not only pays low fees and is zero vacant, he even replaces his own dishwasher and any appliance that fails. My kind of renter, even if that is a unique case.

Cost here would just get you quizzical looks

That would go hand in hand with below here since new units are being built and the builders are not anticipating losing money. If the property will cash flow, then they will build when demand is good.​

first and foremost the property must rent for more than my mortgage, insurances, taxes and HOA fees

I think the average new unit builder would want the same thing. Even if they occupy one unit, they have in mind some sort of metric where the other 3 units are basically paying the cost and they either are thus "rent free" or very close to it. And by living there they generally get a cheaper homeowner insurance policy, etc.

 

[Deleted member 130081]

interesting take. mine is a little different. first and foremost the property must rent for more than my mortgage, insurances, taxes and HOA fees (i am on the get rich slow system and want the passive income for retirement). i have been in the rental game for a long time and over the past 8 years or so i have sold off everything but 1 bedroom condos, and bought a few more. i prefer the simple road when it comes to income properties. if i only have 1br properties i can't legally rent to anyone with children over 2 (all my rentals are in the same city). while i have nothing against kids by nature they destroy everything, so that is a money saver. i am only responsible for items inside the paint (in a condo that is appliances and hvac), so if there is clog in a common drain or a common water line breaks i don't have to pay and the association insurance covers any damage i might incur. i don't have to worry about the tenants keeping up with exterior maintenance (grass, snow, etc). someone is always watching to see what is happening in the association, so it's like having a built-in security system. on top of that i am on the board at the two associations i own so i have a lot of valuable insight from that.

Brilliant long term strategy. Built in management, maintenance and capital improvements out of a single HOA payment. All you have to do is worry about the interior, renting and keeping books...and finding condos to purchase where the numbers work and they allow rentals...