Updated over 4 years ago on . Most recent reply
Apartment Calculations and determining fair market value
When looking at purchasing multifamily, do you do the one percent rule on the current rents or potential rents?
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When we are evaluating a property we always base our values on how the building is currently performing, mainly because that is what we are buying. we typically buy in the commercial space (5+ units) and try to avoid at all cost "buying the future" that being said if the building is grossly underperforming sometimes you (in order to be competitive) must buy into that future.
As far as the 1% rule goes it doesn't play into the valuation as much as the evaluation of the property, simply said the value of the prospective property is X based on your valuation (income/expenses/condition) the question become does X meet your investment criteria and goals, in this case the 1% rule.
to illustrate we recently acquired a building that was severely under performing (8 units with 2 vacancies with the full ones on average approximately $300 each below market) our valuation on the property based on its current performance was roughly 400k, with the owner looking for 550k and a projected 750K ARV. In this instance we had to buy into the future a little bit as 400k was not going to get it done, we did wind up securing it for significantly lower than the asking price and under the city assessment.