I've been researching properties and trying to determine good asking prices. As part of my research/practice I've been using the method described in The ABCs of Real Estate Investing (great book BTW) to determine prices using the formula Purchase Price=NOI/Cap Rate. This method has given me crazy low asking prices on the properties I've practiced with. My question is, does this formula still hold for small multi family (2-4 units) properties? In the book he uses it to determine asking prices for larger multifamily properties.
I've only used it on properties I've been finding listed on Realtor.com/Craigslist so maybe these numbers are so far off because I'm looking at properties that are already listed well above a good price. I'm trying to be very conservative with my expense estimations. I guessed 10% for Cap ex, 10% for property management, 10% for general maintanence, $650 per unit for insurance, and the county tax assessor website to get actual taxes. Am I guessing too high the expenses leading to an NOI that is too low? Also, is there a good way to estimate cap rates for a neighborhood other than speaking to a realtor?
Appraisals on multifamily 2-4 units are done using sales comparables not CAP Rates.
I second @Crystal Smith Until you get into the commercial property arena (5+ units) your appraisal will be primarily based on a sales comparables approach.
@Heath Green With that said, you should be looking at properties with an investor mindset which it sounds like that is exactly how you are approaching the investment decision. Expenses and cap rates really depend on your sub-market and the overall condition of the property. I would recommend connecting with either another local investor or a broker (who works with investors quite often) so that you can get a better handle on expenses and cap rates. Once you have a handle on these items you should be able to determine a reasonable price and your expected returns. Atlanta is a great market to be starting in. I wish you luck!!
Thanks for the feedback!
Heath - How did it go?
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