Investor · Chicago, IL · Member since 2013 · 227 posts · 31 votes
So I've found that its difficult to evaluate multies in my area using the 2% rule, because everything is is priced much higher.
So my question is does anyone have experience in massachusetts with using market cap rates with NOI to value the property and do you feel that this is a "Semi" accurate method with determining value (especially when comps are not available)?
As Ann said it is tough to use any of these things with out the proper context.
Yeah 2% is not likely to happen much around here. At the event last night I was the only person in the room that found one in MA. I found ONE in 6 years so if you use that as your buying criteria around here don't expect to buy much.
NOI with a market CAP is going to be you best method. As a first pass you can use the 50% rule to see if the price is in the ballpark.
Example is a 3 family where you expect each unit to get $1000/month of rent. That is $3K a month so using the 50% rule your NOI would be $1,500. For the year that gives $18,000. If you use a 10% CAP then that is $180,000. If the place is listed at $190K you should get the real numbers and evaluate more. If it is on the market for $325K then it probably isn't worth the effort to figure out how much it will cost to plow the driveway or exactly what the bill for the common electric is.
Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes
13y
Samson, I wish you made it to Black Diamond last night, it's EXACTLY what we were talking about. We discussed 50% rule, 2% rule, 1% rule, NOI, GRM etc. And used a case study to illustrate it, and talked about why it's very difficult to use any of those indiscriminately without knowing more about the particular property.
Using NOI is better IF the factors that go into the published NOI are accurate. So we also talked about all the things that get left out of the listing.
Do a google search for APOD Gary Tharp, and download the free APOD. Or go to fileplace and search through some of the uploaded templates. @Kevin Barrett uploaded a Somerville APOD here, I haven't checked it out, but do some investigating. These might be very helpful to you.
As Ann said it is tough to use any of these things with out the proper context.
Yeah 2% is not likely to happen much around here. At the event last night I was the only person in the room that found one in MA. I found ONE in 6 years so if you use that as your buying criteria around here don't expect to buy much.
NOI with a market CAP is going to be you best method. As a first pass you can use the 50% rule to see if the price is in the ballpark.
Example is a 3 family where you expect each unit to get $1000/month of rent. That is $3K a month so using the 50% rule your NOI would be $1,500. For the year that gives $18,000. If you use a 10% CAP then that is $180,000. If the place is listed at $190K you should get the real numbers and evaluate more. If it is on the market for $325K then it probably isn't worth the effort to figure out how much it will cost to plow the driveway or exactly what the bill for the common electric is.
The rule is loosely that over a long period of time and across your portfolio your non financing expenses will run you around 50% of your gross rents.
There is no inherent reason that a condo will not work any different than any other property for this. Basically the fee should just be shifting some of the direct expenses in maintenance, management and CapEx repairs to the indirect HOA fee.
You will want to be careful on how high the fee is though. If the community you are looking at has a lot of "Fluff" that jacks the fees up make sure you can get a premium rent there that will offset it. If you can only get about the same rent as another complex down the road that has a fee $200 less but no tennis courts and rec center it is obvious where you should buy.