Posted by Tony Colella on August 06, 2008 at 12:44:37:
There are many ways to value income properties, the most important (cannot stress this enough) is to NOT combine stratgies.
CAP rates are one way but I must admit I do not like them at all for small parks and especially for people trying to buy their first park.
I like to use what I call the “checkbook analyis.”
I take Gross income less vacancies, uncollectibles, less all expenses and the most important one is to Pay Myself First as an expense (this would also be money used for managemet if need be).
What is left over is what the property can afford to pay in debt service.
This way, the month you buy the property you know you can pay all the bills and mortgage and you actually get paid. The checkbook will balance and their ins’t any real fancy math to make mistakes with that can cost you that property.
No right or wrong way, just don’t combine methods. It is however a good idea to try different methods separately if you like to see how they compare.
Tony