Pricing - market vs cash flow

3 Replies

We all know that commercial real estate often is valued and sells based on the rent it draws.  How mush do you think that applies to single family houses?  We've got a house in Memphis (rehabbed, no work needed) which is rented for $725 on a lease with 20 months to go before renewal, in a neighborhood where rents run $700 to $750.  Management, property taxes and insurance run $216, for an annual cash flow of $6,108.  If somebody is looking for a 10% return, that would mean they should be willing to pay $61,080 for the property.  However, the prices in the neighborhood include foreclosures, so are all over the board.  We are thinking $52,000 would be a good listing price.  What do you think and why?     

Originally posted by @Stephen Masek :

We all know that commercial real estate often is valued and sells based on the rent it draws.  How mush do you think that applies to single family houses?  We've got a house in Memphis (rehabbed, no work needed) which is rented for $725 on a lease with 20 months to go before renewal, in a neighborhood where rents run $700 to $750.  Management, property taxes and insurance run $216, for an annual cash flow of $6,108.  If somebody is looking for a 10% return, that would mean they should be willing to pay $61,080 for the property.  However, the prices in the neighborhood include foreclosures, so are all over the board.  We are thinking $52,000 would be a good listing price.  What do you think and why?     

The best and most accurate way to value a property is by direct sales comparison.  The main reason that the income approach is used for commercial properties is because of leasehold considerations.  If the property has a long term lease at below market it will sell for less than the EXACT same property next door that has market rate leases.

Homes are generally rented short term and there is usually no shortage of direct sale comps.  Any time you add numbers they are subject to manipulation and misinterpretation.

In terms of yield I have to get it to 44K before it hits 10%.

I cant get my spreadsheet to format in this post but at that rent it is right at the bottom of where a lot of out of state investors would buy so I think in the 50's could be a challenge.


Dean:

Your post is unclear to me.  Are you assuming a loan?  Loans for such small amounts are generally not available, at least not from conventional lenders.  

The actual yield is $6,108 per year.  Somebody only paying $44,000 (plus $1,000 in closing costs) would have a yield of 13.6%.