How to price a property with duplex/ADU income potential?
Hi BiggerPockets Community,
I am about to sell my first renovation project where I remodeled the basement into another living space (there is also a separate entrance to the basement).
I'm located in Portland, OR and these types of properties are popular and this could be permitted as an ADU because it meets the height and square footage requirements.
I want to make sure I don't leave money on the table, how would I determine the list price given that it has the opportunity to generate rental income? (long term or short term)
Curious to know your thoughts, thanks!
@Laurie Horning Most residential properties will be valued based on comps, not income. Thus the rental space won't necessarily get you a higher price. The minute the appraisal comes in, it will be valued against similar properties in the neighborhood which might or might not have rental unit ADU's as well.
I would work with an agent familiar with selling properties with ADU's or rental properties. In my experience, if the rental income doesn't attract an investor at the price, you won't even get any bites from the investor pool. Price will instead be dictated based on appraisal.
To come up with the price however, come up with a ballpark estimated price. Determine avg down payment. Now calculate rental income - expenses and divide by Total Cash Invested(avg down payment) ie. Cash on Cash Return.
Estimated price x .20 = avg down payment
Cashflow(Rental income - avg expenses) / Avg Down Payment(Cash Invested) = Cash on Cash return.
If that return doesn't equal something that would be attractive to an investor, lower the price until it does. OR stick with the appraisal amount/agent suggestion.
@Chris Levarek Thank you for providing that breakdown. Yes, it would make sense to do it that way and I appreciate the formula you explained if I'm trying to market it to investors.
