Each has its own way of illustrating to the investor if the apartment requires more detailed analysis based on the asking price.<\/p>\n
The purpose of this tutorial series is to provide investors a better understanding of each measure and how to apply them when evaluating apartment deals.<\/p>\n
Before diving into real estate investing, make sure you understand how to compare markets and properties. Whether you\u2019re trying to decide between investing in Boise or Sacramento\u2014or you\u2019re just comparing two similar homes\u2014this guide will walk you through all the numbers you need to know. From calculating cash-on-cash return to running a comparative market analysis, the experts at BiggerPockets demonstrate the steps you need to follow and the statistics you must know with\u00a0The Beginner\u2019s Guide to Real Estate Market Analysis<\/a>.<\/em><\/p>\n The most popular of the three metrics is Price per Unit. It\u2019s often used because it\u2019s simple and quick to calculate.<\/p>\n What makes it popular is that it\u2019s easy to gather the necessary information to run the calculation. All that\u2019s needed is the asking price and the total number of units.<\/p>\n Example:\u00a0<\/strong>A 10-unit apartment building is offered for sale at $1 million. The property has a total of 20 bedrooms and 20 baths. What is the Price per Unit?<\/p>\n $1,000,000 \u00f7 10 units = $100,000 per Unit.<\/span><\/p>\n If the general price per unit rate is $50k per unit, and the property is offered at $100k per unit, then red flags should be raised immediately. If evaluating multiple deals, this might be one you choose to set aside.<\/p>\n Precaution #1 \u2013 Neglecting to Factor in Property Features<\/strong> Precaution #2 \u2013 Ignoring the Investment Feasibility<\/strong> Price per Unit is easy to calculate so it\u2019s often a good initial measure to use. However, keep in mind that Price per Unit only looks at the number of units; it completely ignores everything else about the property including its features, location, and income and is limited in its usefulness. Therefore, if the deal passes the Price per Unit test, then move on to the GRM test, which we\u2019ll cover in Part 2 of this series.<\/p>\n![\"\"](\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/05\/The-Beginner\u2019s-Guide-to-Real-Estate-Market-Analysis.jpg\" "\\"\\"")
<\/a><\/p>\nExploring Price per Unit<\/h3>\n
Price per Unit = Price \u00f7 Number of Rental Units.<\/pre>\n
\nWhat if the general rate in the area was $75,000 per unit? Will you still be quick to discount the property? One precaution to take with Price per Unit is that it doesn\u2019t take into account property features such as amenities, location, or floor plans. Each of these can add or subtract to the Price per Unit value. Let\u2019s say the 10-unit subject property\u2019s 2bd\/2ba units are generous in size at 1400 sq ft each. Other surrounding properties have outdated floor plans with only 2bd\/1ba models and average 800sq ft each going at the general rate of $75k per unit. The higher price per unit of the 10-unit apartment would then be warranted because of its more modern features and larger floor plans. If you were strictly comparing price per unit rates, then you may have dismissed this opportunity by thinking the property was overpriced.<\/p>\n
\nSince Price per Unit is based on the physical feature of the property, it\u2019s really a physical measure, not a true financial measure. Because the income is never reflected in the formula, price per unit provides little insight towards financial feasibility of the investment property. You can\u2019t derive from it whether the investment property will provide a suitable return or not. A property could be offered at a low price per unit but still turn out to be a horrible investment because of negative factors such as bad location or problems due to deferred maintenance. Alternatively, a high price per unit doesn\u2019t necessarily mean it\u2019s a bad deal as illustrated in the section above.<\/p>\n