Valuing Condos
Hi all,
I'm looking to jump into real estate soon. I am trying to decide between buying a condo or perhaps a multi family home. I have read that a good method for estimating the true value of a home is to compare it to expected yearly rental income, much like a Price/Earnings ratio. So a 160k home that brings in 10k a year has a P/E ratio of 16. I hear 16 is the US average for homes. I'm sure this method leaves out some important things to consider but nonetheless, it seems pretty darn useful.
My questions is how can I apply this to condos. Is 16 an average for condos? Should I factor this by subtracting the HOA fees from the rental income. If so, it seems you would be undervaluing the condo (or overstating the P/E ratio). I say this because HOA fees cover many types of spending that also occur on single or multi family homes (roof, plowing, heating repairs etc) and these costs would not otherwise be taken into the first equation when valuing a single family / multifamily home.
I look forward to hearing some useful info on how to value properties, I certainly still have much to learn.
Thanks in advance!
Most Popular Reply
Eliot Rubin I too have tried to use my equity investment analysis towards RE but Bill is right. I still think the basic functionality exists between the two, but Cap Rates and IRR are much better. There are several other rules of thumb discussed at length here. You might try and search some of the forum threads here and take a look at other measures used when valuing revenue, earnings, but a few of them are the 50% rule and 2% rule.