estimating the value of a condo

[Eliot Rubin]

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!

[Justin Silverio]

Welcome to BP Eliot.

Every market is different and everyone has a different investment threshold. The Boston and surrounding markets are very hot right now and there is value in buying condos as an investment. It all boils down to the numbers and assessing what return you what to receive. Do some research on how to assess value for condos and then search for condos that meet your criteria. Some terms to consider are Cap Rate, 50% rule and cash on cash return.

Good luck.