# Rental Value? - Posted by Greg

Posted by Paul NM on December 20, 2000 at 10:23:22:

Hi Wayne,

I learned it from a Broker/Invester/apt. owner friend who bought 6 multi unit buildings (250 units) from distressed lenders in the early 1990’s. I liked it because I didn’t have to waste a lot of time on due dilligence when screening prospective purchases. It also provided a nice easy way to get a quick fix on the effects of vacancy changes, rent raises etc. It also pulls out the effect of financing.

Paul NM

Rental Value? - Posted by Greg

Posted by Greg on December 18, 2000 at 20:23:46:

How does one determine what the value of the total rental income is?

If you have a total monthly rental income of \$1445.00 p/m or 17,340 a year, it must have value sperate from the quality of the building. I saw an equation to that effect but I will be horn-swoggled if I can figure it out.

Owner wants 30k in a war zone, is motivated and flexible so ifn ya got any idees, please…

I hope yous guys can understand what I am trying to say :-\ type talkin ain’t my best subject.

Thxs
Greg

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

Re: Rental Value? - Posted by dewCO

Posted by dewCO on December 19, 2000 at 13:34:14:

Are you talking about a CAP (for capitalization) rate? Don’t know anything else that would be remotely similar. Probably there are posts in the archives on CAP rates.

Re: Rental Value? - Posted by WayneMD

Posted by WayneMD on December 20, 2000 at 09:01:44:

Paul – Where can I find out more about these various rent formulas?

Thanks, Wayne

Re: Rental Value? - Posted by Greg

Posted by Greg on December 19, 2000 at 18:15:53:

Thanks

Greg

Re: Rental Value? - Posted by Brent_IL

Posted by Brent_IL on December 19, 2000 at 13:54:13:

I read good information on cap rates on this site’s Commercial board.