Comps when analyzing rental property?

Question

Do I care about comps when analyzing a rental property for cash flow? Other than determining the ARV to see how much built-in-equity I have, do I really care about comps on a longer-term buy and hold cashflow play?

Thanks!

David Faulkner · Answer

Is this a serious question? Yes, of course you care about the comps, always. For your primary residence, for flips, for long term buy and holds, yes, always, always, always, you care about the comps. If you over pay, you paint yourself into a corner with your possible exit strategies and if your cash flow doesn't work out as expected or something else happens where you need or choose to sell, then you are trapped and the only way to exit is to take a loss and bring money to the closing table. On the other hand, if you get a great deal, not only do you get more of your precious cash flow, but you are also able to sell at profit if you need or choose to, and you are able to cash out refinance if you need or choose to, and you have instant profit in the form of equity and possibly forced appreciation. In short, you have more options, better profit margins all around, and are insulated to some degree from any short term market fluctuations or unexpected events that may occur. Why would you NOT care about that ... the only person that would say you shouldn't care is the person trying to sell you the property and/or services associated with the property, and they are not the best source of investment advise. You seriously need to take off those cashflow blinders, they are giving you a very dangerous case of tunnel vision. Cash flow is an important thing, but it is not the only thing.

Kuba F. · Answer

If you care about pulling that equity out at some point you might care. If you want to know what kind of refinance options you have.  Comps give you an idea of the level of finish required to justify your desired rents.  Not taking current value and appreciation into account is an incomplete picture of a deal and limits possible exits if needed later.

Comps when analyzing rental property?

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