Updated almost 9 years ago on . Most recent reply
Property value & offer price calculations
Hey Bigger Pockets!
I am currently reading through the ABC's of real estate investing by Ken McElroy and have run into an issue regarding offer price. In McElroy's book he says to determine the property value and offer price you simply divide the Net operating income by the Cap rate. Seems easy enough. But when I go to do my calculations my offer price is coming out to be exactly what the listing price is even though my cash flow is subpar. Here's an example:
123 Main St.(4-unit) Listing price: $159,000
NOI: $15,549.00
Cap Rape: 9.78%
Cash flow: $405.21/Month
Property value & offer price= NOI/Cap Rate 15,549 / 9.78%= $158,988.
My confusion comes in at how is this the offer price when this is already the listing price and my cash flow is subpar? I know for a fact that this listing price is a retail price for my market and I wouldn't dare to purchase that property at that price. Is there something I'm missing? Do you guys have any better advice on how to come up with a purchase price?
Thank you guys in advance!
-Tristan Thomas