Investor · Milwaukee, WI · Member since 2016 · 22 posts · 3 votes
Hi,
So, is there a formula to be used taking only rental income into consideration to determine the value of a property? I'm interested in a 12 unit complex that generates $93,600 annual gross income; taxes are $15,800.
From what I've learned recently (and having a hell of a time doing it), cap rate is one indication. Call a local commercial lender or ask another investor what the cap rate for the area is, and then divide cash flow (NOI-debt service, annual) by purchase price to come up with the cap rate. Depending on area you'll be anywhere from 6-15%. Good areas have lower risk, lower cap rates, but a more stable and reliable return. Poor areas tend to have very high cap rates (why they're appealing to certain investors who are not so risk averse and wise yet ;), but remain questionable whether you'll ever achieve that return with a C-D tenant base.
GRM, or gross rent multiplier is another valuation metric, but I can't seem to find it so worthwhile yet. Call a property management group or that same commercial lender and ask what the GRM is for the area. Look up how to run those numbers because I don't remember so well.
Last valuation in commercial property is comps. What does a similar property in the area sell for? This one is tough because there may not be anything that similar, unless you're looking at a 6 unit and have another one just down the street that recently sold.
As an investor you should also think about cash on cash return. Divide annual cash flow by initial cash investment. With rental property we want high COCRs, otherwise we'd just invest in index funds with a safer and more consistent historical return of 9-10%.
In short, I don't know how to say this property is worth X, but I hope that's a start. I googled 'how to evaluate commercial property' a few weeks ago and came up with a good thread explaining all these metrics.
I hope that's a start. Good luck!
JTM
And in response to your question, I don't think so. You need to know expenses to know what the property actually makes. But I'm a goal newb. Again, good luck!
JTM
@Doug Prahst You aren't pricing in any maintenance or CapEx, utilities, trash, grounds etc. so you are inflating NOI. If it were me I would figure out what price/unit for comparable properties are selling for and go from there.
If a similar property is selling at $25k per unit I would start there and adjust based on location, condition, leases, etc...
This all sounds great, and maybe there is a correct formula for figuring what the property is worth, but does it matter? I'd just run the numbers using all of the expenses and see what I would need to offer to cash flow the way I want, maybe better than what I want. That way there's some bargaining room. If you get it and people think you paid too much, just show them the profit checks that roll in. I'd probably find an agent that has experince in the area and ask for a valuation as well, maybe even an appraiser.
This all sounds great, and maybe there is a correct formula for figuring what the property is worth, but does it matter? I'd just run the numbers using all of the expenses and see what I would need to offer to cash flow the way I want, maybe better than what I want. That way there's some bargaining room. If you get it and people think you paid too much, just show them the profit checks that roll in. I'd probably find an agent that has experince in the area and ask for a valuation as well, maybe even an appraiser.
Market value should be the very first thing to be concerned with. If you over pay that money initially coming back to you may very well be your own cash. Cash flow is not profit.