Re: Rental Value? - Posted by Paul NM
Posted by Paul NM on December 19, 2000 at 15:06:16:
Take the gross annual income and deduct 45% for all expenses except debt service. Divide the balance by the yield you think you should earn on your investment and the result is the price you can pay.
So if the gross is $17,340 subtracting 45% leaves $9,537. If you think you need a 20% return for this kind of property divide 9,537 by 0.20 to project a purchase price of $47,685. This is just a rule of thumb kind of calculation but I find it lets me quickly screen out impossible deals.
Play around with it a little. If you think the tenants will be hard on a place use 50% instead of 45% for expenses. If it’s in the war zone maybe a 20% return is to low; try it with a 30% return (0.30). If you think you can raise the rents or fill the vacancies test the effect by increasing the gross.
Note: What I called “return” or “yield” is correctly (to my understanding) the cap rate.
Paul NM