cap rate

[terri]

I have a very unique 4 plex and it`s difficult to find good comparable sales. One reason being, is that it`s not a legally converted muti unit. Technically it`s a single family with legal non-conforming retrofit status. It`s been grandfathered. (My favorite kind of property. I pay taxes as a single family, collect rents as a multi unit and city zoning is completely aware. ) I`m trying to figure out a post-renovated value to approach the bank for reappraisal and I`ve been paying close attention to sales in the neighbourhood. As well as just looking at the actual sale prices of mulit unit dwellings , I`m also analyzing cap rates, rents, expenses. I know in the past 10% cap rate was the goal, but it seems with 40 yr amortization that is no longer the case, what I`m seeing in my neighbourhood is 5%, 6%. Anything showing 7% cap rate or better has multiple offers on it. Some of these comparables are legal conversions, others are not and don`t even have non-conforming retrofit status (the majority are illegal conversions).

I know from past experience, being "technically" a single family home, the bank`s appraiser will have to compare it to other single family properties with 4 kitchens. What I want to know is: will they just compare amenities, size, sale price or will they look at revenue as part of the value? Will they look at cap rate? What kind of cap rate will the bank expect to see? If I can show that 5-6% is normal for the area will they consider that in their valuation?

Does anyone know what is considered to be a good (reasonable) cap rate nowadays?

 

[mikecunning]

QUOTE (terri @ Dec 6 2007, 10:33 PM) I have a very unique 4 plex and it`s difficult to find good comparable sales. One reason being, is that it`s not a legally converted muti unit. Technically it`s a single family with legal non-conforming retrofit status. It`s been grandfathered. (My favorite kind of property. I pay taxes as a single family, collect rents as a multi unit and city zoning is completely aware. ) I`m trying to figure out a post-renovated value to approach the bank for reappraisal and I`ve been paying close attention to sales in the neighbourhood. As well as just looking at the actual sale prices of mulit unit dwellings , I`m also analyzing cap rates, rents, expenses. I know in the past 10% cap rate was the goal, but it seems with 40 yr amortization that is no longer the case, what I`m seeing in my neighbourhood is 5%, 6%. Anything showing 7% cap rate or better has multiple offers on it. Some of these comparables are legal conversions, others are not and don`t even have non-conforming retrofit status (the majority are illegal conversions).

I know from past experience, being "technically" a single family home, the bank`s appraiser will have to compare it to other single family properties with 4 kitchens. What I want to know is: will they just compare amenities, size, sale price or will they look at revenue as part of the value? Will they look at cap rate? What kind of cap rate will the bank expect to see? If I can show that 5-6% is normal for the area will they consider that in their valuation?

Does anyone know what is considered to be a good (reasonable) cap rate nowadays?


I`m not familar with Cap rates in Toronto...as each market is different so are the `market` cap rates...in Vancouver you are hard pressed to find 5% CAP, most are in the 3.5%-4.5% range...in Alberta last year caps were compressed from the mid 6% range and fell all the way down to around 4% as more condo conversions occured...over the past few months there has been a rise in caps in Alberta and we are now seeing product in the 5%-6% range...

Perhaps ask an appraiser what conforming product sells for on a cap basis...at least then you`ll have a basis for comparison...

Good luck

Mike

 

[terri]

Thanks Mike,

that was quite helpful and eye opening seeing what kind of cap rates other provinces are getting.

I will check with a local appraiser to see what the norm is here in Toronto. I`m wondering if this kind of information is "officially" posted somewhere. How did you get your numbers?


thanks,


Terri

 

[navaz]

Generally I like to see 4-7 % -Ontario has traditionally been a bit higher on the cash flow aspect. Having said that, I find when I buy a place, the previous owner typically does lipstick work and leaves deferred maintainance behind -so the first couple of years, my cap rate is negative.

 

[mikecunning]

Hi Terry,

I`m not aware of any official postings...even if they were official, it would be such a moving targe (i.e. constantly changing) that it`s accuracy would be highly suspect....it is all market driven...my numbers come from my own participation and observations in the market and from reading all those appraisal reports I spend big bucks on but never used to read (only looking at the number can be a problem some times!)

Good luck

Mike

 

[RussellWestcott]

The best solution is to have a good qualified Mortgage Broker on your team (someone who has a focus on multi-family properties), these individuals typically have a good sence for the rate in the areas, based upon other applications they have processed in the area you are dealing with.
But even having these good contacts they will only be able to give you a range and nothing `solid` until you make an application, and give then all the numbers of your property.

But really getting back to your original question. MY OPINION (I`m not a Mortgage Broker... although I do play one on TV

). This property appears to be a single family house (as you mentioned)... with mutitiple rental suites (for example you pay taxes as a SFH), and you would fall into the financing sandbox of single family residential (value based upon market comparables... not Cap Rates). How is the financing structured on the property now? (single family? Multi-family?) I`m not sure if the bank would look that the fact that the house is `grandfathered` in...

... However, I guess the only way to really find out is to make your strong case, why you feel it is a multi-family property, get all your numbers together and update your Sophisticated Investment Binder... then start shopping it around to a couple of Mortgage Brokers that may deal with these types of properties. Talk to a few professionals (including a couple of good appraisers) and then get back to us and let us know what their opinion is...

Cheers

 

[terri]

QUOTE (RussellWestcott @ Dec 8 2007, 11:11 AM) The best solution is to have a good qualified Mortgage Broker on your team (someone who has a focus on multi-family properties), these individuals typically have a good sence for the rate in the areas, based upon other applications they have processed in the area you are dealing with.
But even having these good contacts they will only be able to give you a range and nothing `solid` until you make an application, and give then all the numbers of your property.

But really getting back to your original question. MY OPINION (I`m not a Mortgage Broker... although I do play one on TV

). This property appears to be a single family house (as you mentioned)... with mutitiple rental suites (for example you pay taxes as a SFH), and you would fall into the financing sandbox of single family residential (value based upon market comparables... not Cap Rates). How is the financing structured on the property now? (single family? Multi-family?) I`m not sure if the bank would look that the fact that the house is `grandfathered` in...

... However, I guess the only way to really find out is to make your strong case, why you feel it is a multi-family property, get all your numbers together and update your Sophisticated Investment Binder... then start shopping it around to a couple of Mortgage Brokers that may deal with these types of properties. Talk to a few professionals (including a couple of good appraisers) and then get back to us and let us know what their opinion is...

Cheers

I think you`re right, Russell, value will be based on market comparables not cap rates, because technically, it is listed as a single family and my current mortgage is single family as well.

It`s a very unusual building, however, it was originally built as a store front around 1890, and it`s never actually been a single family home, and in no way resembles a single family home. It looks like a small apt building, it`s laid out like a small apt building, and when I`m done renovating, it`s going to have 4 brand new, totally hip, totally cool apts, a block away from the trendy gallery district of Queen West, and a block away from a bunch of new loft developments like Westside Gallery Lofts (which I`ve attempted to style my apts after). I`ve also added touches like custom sculpture bike locks (popular area with cyclists), and I want to include a mini art gallery(area attracts artists, designers, photographers). It`s going to be impossible to find a good comparable because there`s nothing else out there like it. Which is why I was hoping to go the cap rate route because I will be almost doubling the rent after renovation.

I will definitely take your suggestion and put together a package showing why it should be valuated as a multi unit and I`ll keep you posted as to how the appraisers respond.

Renovation is expected to be completed in feb. (still waiting on permit, actually had to go to committee of adjustments, first time going to committee, great learning experience and application got approved, yah!)

thanks so much for your help and advice,

Terri Frank
[email protected]
queenwestrentals.com (website still under construction, just like my properties)

 

[Peter]

QUOTE (terri @ Dec 7 2007, 12:33 AM) I have a very unique 4 plex and it`s difficult to find good comparable sales. One reason being, is that it`s not a legally converted muti unit. Technically it`s a single family with legal non-conforming retrofit status. It`s been grandfathered. (My favorite kind of property. I pay taxes as a single family, collect rents as a multi unit and city zoning is completely aware. ) I`m trying to figure out a post-renovated value to approach the bank for reappraisal and I`ve been paying close attention to sales in the neighbourhood. As well as just looking at the actual sale prices of mulit unit dwellings , I`m also analyzing cap rates, rents, expenses. I know in the past 10% cap rate was the goal, but it seems with 40 yr amortization that is no longer the case, what I`m seeing in my neighbourhood is 5%, 6%. Anything showing 7% cap rate or better has multiple offers on it. Some of these comparables are legal conversions, others are not and don`t even have non-conforming retrofit status (the majority are illegal conversions).

I know from past experience, being "technically" a single family home, the bank`s appraiser will have to compare it to other single family properties with 4 kitchens. What I want to know is: will they just compare amenities, size, sale price or will they look at revenue as part of the value? Will they look at cap rate? What kind of cap rate will the bank expect to see? If I can show that 5-6% is normal for the area will they consider that in their valuation?

Does anyone know what is considered to be a good (reasonable) cap rate nowadays?

While the property is obviously quite unique, because it does have only 4 units (legal or not) the bank would still look upon it as residential financing meaning that the appraiser will be appraising it that way - from a comparable value as opposed to a cash flow value in which case, the cap rate would not play much of a role in determination of value.

While you could make an argument that it is multifamily, you would likely want to get it financed residentially if you could - the financing generally comes with a lower rate and fewer fees, not to mention fewer conditions. The bank will likely only allow you to use the income from the legal suites to qualify (the appraiser will make note of that) but in many cases, that`s all you need to qualify.

Hope that helps,

 

[terri]

QUOTE (Peter @ Dec 9 2007, 01:10 PM) While the property is obviously quite unique, because it does have only 4 units (legal or not) the bank would still look upon it as residential financing meaning that the appraiser will be appraising it that way - from a comparable value as opposed to a cash flow value in which case, the cap rate would not play much of a role in determination of value.

While you could make an argument that it is multifamily, you would likely want to get it financed residentially if you could - the financing generally comes with a lower rate and fewer fees, not to mention fewer conditions. The bank will likely only allow you to use the income from the legal suites to qualify (the appraiser will make note of that) but in many cases, that`s all you need to qualify.

Hope that helps,

Thanks Peter,

that helps alot because now I can stop spending my time and energy trying to find out the cap rates of all the comparables are.
much appreciated,

Terri
[email protected]

 

[Thomas Beyer]

we try for around 7% CAP rate going in .. going to 10% in about 2 years after upgrades and rent increases .. but this is VERY hard to find these days in any decent economy in Canada ... slightly better in the US ..



most CAP rates tend to "forget" the ongoing capital upgrades required for new roof, carpets, fridges, outside repair .. so most pro-forma CAP rates are too high to start with ..



a CAP rate is highly dependend on the prevailing mortgage / bond rate .. and with a 5 year bond around 4% .. anything that is 2% or higher is decent .. or 3-4% in smaller centers .. as smaller centers are more volatile and less liquid (i.e. harder to sell) .. but usually much better cash-flow .. with had good success with secondary markets close to big cities (i.e. Camrose, StonyPlain, Wetaskiwin, Leduc ..)



look at this entry too:



http://myreinspace.com/public_forums/Real_Estate_Discussion/62-10711-Equity_is_not_the_only_way_to_make_money_in_real_estate.html

 

[terri]

QUOTE (RussellWestcott @ Dec 8 2007, 11:11 AM) The best solution is to have a good qualified Mortgage Broker on your team (someone who has a focus on multi-family properties), these individuals typically have a good sence for the rate in the areas, based upon other applications they have processed in the area you are dealing with.
But even having these good contacts they will only be able to give you a range and nothing `solid` until you make an application, and give then all the numbers of your property.

But really getting back to your original question. MY OPINION (I`m not a Mortgage Broker... although I do play one on TV

). This property appears to be a single family house (as you mentioned)... with mutitiple rental suites (for example you pay taxes as a SFH), and you would fall into the financing sandbox of single family residential (value based upon market comparables... not Cap Rates). How is the financing structured on the property now? (single family? Multi-family?) I`m not sure if the bank would look that the fact that the house is `grandfathered` in...

... However, I guess the only way to really find out is to make your strong case, why you feel it is a multi-family property, get all your numbers together and update your Sophisticated Investment Binder... then start shopping it around to a couple of Mortgage Brokers that may deal with these types of properties. Talk to a few professionals (including a couple of good appraisers) and then get back to us and let us know what their opinion is...

Cheers

okay......so here was the answer that I received from my mortgage lender`s appraiser:
"For us we use sales for a 4-plex but thats b/c of the banks policy. As an investor you can use either ....so you may have to go outside your area for sales and then use a cap rate to verify the value."


Terri
[email protected]

 

[terri]

How is a legal non-conforming property appraised?

okay so it`s been over a month since I first posed the question about how to find out what cap rates are in the neighbourhood, and whether or not my property would even be evaluated by cap rate based on the fact that it`s listed as a single family with legal non-conforming status.

I never did get a straight answer from anyone about what the cap rates were, I tried asking mortgage brokers but no one ever got back to me, and I was told by many people that the property would be evaluated based on direct comp sales, anyway, so cap rates didn`t matter.

I called an appraiser at the company that my bank uses and he said that it would be evaluated based on direct comps with cap rates to confirm value. I asked him what the cap rates were right now and he never got back to me, either.

At the last RIEN meeting Don mentioned that the bank can tell you what the cap rate is they are using for an area, spoke with 3 mortgage brokers, none could tell me what the current cap rate was for my area.

My renovations are almost complete and my re-appraisal is schedules for monday. the appraiser that I had originally booked no longer works for the company, I have a new appraiser coming out. I asked him the same question, how will the property be evaluated. The answer I got...because it has 4 units, doesn`t matter if it`s retrofit it will be evaluated on cap rate..exactly oposite of what everyone else was telling me, including another appraiser from the same company. so on to my next question: What was the cap rate? he didn`t know. he then later changed his answer to say it would be evaluated based on 3 criteria, cap rate, direct comparable solds, and gross rent/sale price.....he still didn`t know what the cap rate was.

Question for other REIN members, how is it that at the same appraisal house, 2 different appraisers would use different criteria to appraise the same property and question 2, why can`t anyone tell me what the cap rate is? I did my own anaysis of all the solds in the area with stated income and came up with my own #, but that would put my property at $150,000 over what I think the appraisal will come in at. Is that why they give me a #? In case it puts my value too high?

thanks,

Terri

 

[benho2006]

Hi Terri,

I`m new to the forum and REIN. I also am in Toronto High Park area. I`m fascinated by your experience for this investment. What was the result of the appraisal? My past experience with bank appraisers is: they don`t give answers. I`ve just started investing in RE and would characterize myself as a cautious investor. I`ve so far got a condo as my investment property which cashflows about $100/month considering vacancy, r&m, PIT, condo maint fee and paying myself interest on dp equal to I in PIT. It`s not a lot but at least it carries. Anyways, I`m interested to know what happened next with your story. Would you mind sharing?

-ben

 

[Luong98]

QUOTE (terri @ Dec 6 2007, 11:33 PM) I have a very unique 4 plex and it`s difficult to find good comparable sales. One reason being, is that it`s not a legally converted muti unit. Technically it`s a single family with legal non-conforming retrofit status. It`s been grandfathered. (My favorite kind of property. I pay taxes as a single family, collect rents as a multi unit and city zoning is completely aware. ) I`m trying to figure out a post-renovated value to approach the bank for reappraisal and I`ve been paying close attention to sales in the neighborhood. As well as just looking at the actual sale prices of mulit unit dwellings , I`m also analyzing cap rates, rents, expenses. I know in the past 10% cap rate was the goal, but it seems with 40 yr amortization that is no longer the case, what I`m seeing in my neighbourhood is 5%, 6%. Anything showing 7% cap rate or better has multiple offers on it. Some of these comparables are legal conversions, others are not and don`t even have non-conforming retrofit status (the majority are illegal conversions).

I know from past experience, being "technically" a single family home, the bank`s appraiser will have to compare it to other single family properties with 4 kitchens. What I want to know is: will they just compare amenities, size, sale price or will they look at revenue as part of the value? Will they look at cap rate? What kind of cap rate will the bank expect to see? If I can show that 5-6% is normal for the area will they consider that in their valuation?

Does anyone know what is considered to be a good (reasonable) cap rate nowadays?

This will be considered a residential appraisal and will not require a cap rate. I`m assuming there aren`t too many properties that are setup like yours so this property will fall under a unique and complex appraisal and will probably require more work to complete the assignment properly. Anything under 4 units or even 6 or 8 units will not require a cap rate. A "Schedule A" using Gross Rent Multipliers (GRM) for his/her Income Approach will work though. But, it does not guarantee that the appraiser will based his final value on solely just the Income Approach.