How to Value Extra Rooms During Analysis

Question

How do you value an extra feature in a house/appt, be it a room or Gararge (space or type)?

I am new at analyzing properties for purchase and hold. Sorry if this question has been asked before and I missed it. Say you have a property, a duplex  with 2bed/1bath in each unit and it goes for 250K. The second property is also a duplex with 3bed/1bath and 2bed/1bath and goes for 275K. Let's assume these are in comparable neighborhoods, and all other features are quite similar. The 2nd unit  obviously has a higher rent and a higher cash flow.  How do evaluate the two units to determine if the difference in cash flow between these unit is worth the 25K difference in their purchase price?

Thank you

Thomas S. · Answer

You need to thoroughly understand your own market before you begin looking at properties to purchase. All this information should be in your head and available so that when you look at properties you know exactly how the numbers play out.

Education is the key and generally takes 6 months to a year of diligent study to acquire.

You also need to sit down and learn all your state landlord regulations if you intend to hold properties as rentals. This is information you need to know before you purchase not after. As a business owner you have legal responsibilities.

Joel Poualeu · Answer

@Michael Henry , this is very helpful. Thank you

Michael Henry · Answer

@Joel Poualeu it seems like the each bedroom is not going to be worth the extra 25k. You need to call around to see what three bedroom unit rents for. Rentometer is a good site as well. To calculate your ROI on the third bedroom first figure out what the difference in rent you will in for the third room, multiply that number by 12, then divided by 25k; this equals your ROI. Example:

Rent difference between 2bd/3bd: $125 X 12 =$1,50/ $25,000 = .06 or 6%.

You would be paying an extra $25k for a 6% return if you only received 1500 for the third room. The more you could charge the higher that number would go.

I hope that helps?

Mr. Duplex