- Joined
- Aug 26, 2010
- Messages
- 380
My partner and I have the choice of building either a 5 or 6 unit building as part of the second phase of a development we're doing. In the first phase we did a 9 unit property and a 2 unit property next to it. The 9 unit property was valued through the income approach, the analysis was purely numbers driven and conservative due to it being CMHC insured, and the final per unit valuation came back at about 130K/unit. However, because the 2 unit property was valued on the comparables approach and there seem to be lots of people paying very high prices for small multi family, the per unit value on the duplex came back at over 160K/unit even though the location was worse in the overall site and the rents were less. Naturally we seek to maximise the dollars coming back on the final refinance.
Now we have the choice to build either a 5 unit bldg for about 470K or a 6 unit bldg for about 560K. However, because the extra unit would mean moving from the comparables approach to valuation to the income approach, the final financing value would actually drop despite having a higher income.
My question is for the financing people and experienced developers and operators. How difficult is it to finance a new 5 plex under the residential approach? What banks and lenders are looking at 5 plexes as residential rather than commercial? 5 plexes have always been a weird size to finance - would banks repeat our experience with the duplex of adding an extra 30K per unit just because it is now residential?
This is an important question as building a 6 plex would cost 80 K more yet be valued at up to 150K less rather than building a 5 plex for less money AND getting a much higher valuation. The investment case for making the switch to residential would be that the returns would now come from amortization rather than cashflow as we have all our original capital back and could do another project whereas the 6 plex would result in only 20 % or so of the capital being returned to us due to the much lower valuation. The added risk of increased leverage would be handled by taking say 50K of the added cash from refinance and putting it in the complex reserve account - interest rates at sub 3 % will mean big paydown, and the bigger reserves would ensure surviving out to the 5 year mark.
The million dollar question (actually, the 180K question) is whether or not there are banks that will accept that added per unit value on a 5 plex - are they out there????
Thanks so much in advance.
Tris
Now we have the choice to build either a 5 unit bldg for about 470K or a 6 unit bldg for about 560K. However, because the extra unit would mean moving from the comparables approach to valuation to the income approach, the final financing value would actually drop despite having a higher income.
My question is for the financing people and experienced developers and operators. How difficult is it to finance a new 5 plex under the residential approach? What banks and lenders are looking at 5 plexes as residential rather than commercial? 5 plexes have always been a weird size to finance - would banks repeat our experience with the duplex of adding an extra 30K per unit just because it is now residential?
This is an important question as building a 6 plex would cost 80 K more yet be valued at up to 150K less rather than building a 5 plex for less money AND getting a much higher valuation. The investment case for making the switch to residential would be that the returns would now come from amortization rather than cashflow as we have all our original capital back and could do another project whereas the 6 plex would result in only 20 % or so of the capital being returned to us due to the much lower valuation. The added risk of increased leverage would be handled by taking say 50K of the added cash from refinance and putting it in the complex reserve account - interest rates at sub 3 % will mean big paydown, and the bigger reserves would ensure surviving out to the 5 year mark.
The million dollar question (actually, the 180K question) is whether or not there are banks that will accept that added per unit value on a 5 plex - are they out there????
Thanks so much in advance.
Tris