Purchase Price To Rent Ratio?

Question

Account Closed · Answer

@Andrew Clifton  It is a over simplification of the valuation process.  But... if you know your market very well you might be able to weed out lots of bad deals without much thought.

Brent Coombs · Answer

Definitely NOT. eg. Why would you say: "I'd make a good return grossing 1% per month, so that's what my Offer will be", if in that market you could gross 2% per month? You certainly don't want to be offering 100 times the gross monthly rent, if in that market you'd only need to be offering 50 times the monthly rent!

First, ask yourself: Am I investing for positive cash flow? Then: Am I just using 25% of my own deposit to invest? Then, how much of the rent will disappear on the mortgage AND holding expenses (property management, vacancy, maintenance, capital expenditure, insurance, taxes...)?

THEN you'll have a better idea about what your break-even percentage per month would be. But, that tells you NOTHING about what any particular market will let you get properties for. That's when your REAL research begins!

For 1-4plexes, value is determined by comps. So, just look for BARGAINS. For 5plexes or larger, yes, the value IS largely determined by the rent vs expenses ratio, called Cap Rate, quoted as a percent. Whatever the specific market cap rate is in an area, try to buy commercial buildings at a higher cap rate, but never SELL at a higher cap rate! Cheers...