How to value rental property for sale?

[Sean Golin]

Hello,

Was curious what types of valuations are best to use when determining the sale price for a rental property? I've used both GRM and Cap Rate to try to determine an appropriate price but unclear what else should be factored in. Buyer would likely be an investor.

Thanks.

[Scot Howat]

I do it differently than everyone else.  I figure out the properties Debt Value first.  It's a new term I'm trying coin before @Brandon Turner does!

I take the RENT then minus the Insurance, taxes, HOA dues. That's your cashflow if you paid cash.

Now I want to see how much debt that can support.  Plug in your cashflow and divide that by whatever terms of financing you have.  For example:

Rent 1000

Ins 50

Tax 250

HOA 0

= cash flow of 700/m.

You'll take that 700/m "mortgage payment" and divide by 5% for 30 years (or whatever you pay your private lenders for long term debt).  So.....700 / 5% at 30 years = $139,711

That means that I could buy this property for 139,711 and get 100% financing at 5% for 30 year and my RENT minus the PITIA would = $0.  

This is really good when there's no other recent sales, and especially when you're using private money.