Posted by Bill Jacobsen on March 05, 2011 at 19:13:44:
I assumed that the vacent unit could sell for $310 which would calculate to 8.3 times gross rents. Rents are considered low and it is an up and coming area.
I only know my area and the price was estimated based on that. Each area has its own grm and each investor has his own need of return.
Bill
what is the right price? - Posted by Andy
Posted by Andy on February 20, 2011 at 19:51:16:
I have 5 sfh’s, equity and some cash and am considering purchasing a 4 plex. The property has been listed for a year and the current price is 170,000. The property consists of 2 2bdrm 1bath apartments and 2 1bdrm 1bath apartments. The total square feet is approx 3800. The two bedroom apartments are currently rented at 425 and 410. The one bedroom apartments rent for 310, one is vacant. The property appears to be in very good condition but this comes from driving by. I have not had a showing. Taxes are approximately 3400/yr. Tenants pay their own utilities. Based on these numbers what is the highest price that you would be willing to pay. In my opinion, the rents are a little low but I would love to get your ideas based on these numbers. Also, the area I am in will be flourishing due to a huge government contract. Any response will certainly be appreciated!!
Re: what is the right price? - Posted by Bill Jacobsen
Posted by Bill Jacobsen on February 21, 2011 at 12:12:35:
There are many factors we don’t know about the property but let’s assumed that the property is in average to good shape. If the property has been listed for $170,000 for more than a week without offers we then know that it is worth less than that to other investors. We don’t know exactly how much less. We don’t need to know unless you are going to make some improvements and then resale.
If you plan to keep the property then the CAP rate should matter to you. It is a piece of the puzzle of how much you can make on the property. In my area of the country a cap rate of 8% will draw investors.
A CAP rate may not be used on smaller investments but know that each person has their own threshold as to their required rate of return.
Based on the numbers you gave and using some standard metrics I would believe an investor would look at about $145,000. You would have to buy lower if you planned to resale. If rents are lower than market rates then the property could be worth more.
Good Luck,
Bill
Re: what is the right price? - Posted by randyOH
Posted by randyOH on February 21, 2011 at 11:18:48:
Personally, I would want the scheduled monthly rent to be pretty close to 2% of the price I paid + plus closing costs + any repairs needed at the time I bought it.
So, assuming no needed repairs to start, this would translate into a purchase price plus closing costs of around 73k.
Some investors might go as low as 1%, which would give you a price plus closing costs of around 146k. So 170k is way too high for most experienced investors.
Re: what is the right price? - Posted by David Krulac
Posted by David Krulac on February 21, 2011 at 09:40:07:
Obviously more info would be helpful. Presuming that the rents are $17,460, and taxes are $3,400.
What are other owner expenses such as insurance, repairs, maintenance, grass cutting, snow removal, deferred maintenance, water, sewer and trash (even in a building where tenants pay utilities, water, sewer and trash are often paid by owner, not billed seperately to the units, and may be muncipal billed and lienable).
I don’t like cap rates for small units because they are often sold to mom and pops, who don’t know or care what cap rates are. Comp sales are your best measure of value. If you can’t find something in the neighborhood sold in the last 6 months then look for a similar valued neighborhood, neither higher or lower values.
But the bottom line is that if a property, even in today’s recession economy has NOT sold in a year, the price is too high. Your probably looking at a 20% discount at least off the asking price, maybe much more.
Re: what is the right price? - Posted by IB (NJ)
Posted by IB (NJ) on February 20, 2011 at 22:00:01:
Have you looked at the sales comps in the area?
Re: what is the right price? - Posted by Maurice
Posted by Maurice on March 05, 2011 at 15:48:38:
I use the GRM or Gross Rent Multiplier for a quick rule of thumb.
Take the price and divide by the annual rent. In your example this would give a GRM of over nine.
This is higher than I like to see for a 4 plex. It should be 7 or less.
In my market the typical GRM is that high but I live in an area not affected by the real estate crash (Canada). The old rules are not holding water the way they used to because of low interest rates and inflation.
You will have to compare other examples in your area to find what a typical GRM is but it sounds expensive to me.
If something passes the GRM test it pays to get the taxes, insurance, and other expense figures and work out the cap rate. But I have found that a property that has a bad GRM will have a bad cap rate.
Analyse a few similar properties in your area to get a feel for the GRM in your area. It could just be a high priced area or maybe that property is overpriced.
Re: what is the right price? - Posted by Andy
Posted by Andy on February 21, 2011 at 08:38:56:
Can’t find any sales comps. There are numerous 100 year old upstairs/downstairs duplex homes on the market and many that have sold but this is a newer building, built in 70, all ground level apartments with upstairs bedrooms. I have found only one similar property, the exterior is an exact match. This hasn’t been sold since 2001. I will ask my real estate agent if she can pull comps.