Investor · Sunnyvale, CA · Member since 2015 · 4 posts · 0 votes
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.
Investor · Hoffman Estates, IL · Member since 2014 · 434 posts · 185 votes
8y
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.
It depends on the type of rental property. A sfh is only worth what the neighbourhood home buyers will pay. A multi could be cap rate depending on the number of doors.
Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
8y
I would say for a SFR comps determine sale price all the way. For a Multi family cap rate and condition/ location will be what most buyers will look at. Keep in mind many buyers calculate/ add their own expenses thus lowering the cap rate that they see, so trying to be creative in reducing expenses (i.e. not including management even if you use it) may not be helpful.
Investor · Hoffman Estates, IL · Member since 2014 · 434 posts · 185 votes
8y
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.