Valuing 4 Properties - Need Help!!
I'm finally getting some phone calls back from my direct mail pieces and one of my first calls was an interesting situation. The gentleman who called me owns 4 properties all on the same block on 41st Avenue in Oakland, CA. The details for each property follows:
- 4 Bed / 1 Bath SFH - rents for $1,600
- 1 Bed / 1 Bath SFH - rents for $1,200
- 1 Bed / 1 Bath SFH - rents for $1,200
- 3 unit property all 1 Bed / 1 Bath - average rent is $1,200 per unit
All of these currently have tenants in place (so he says). So now my question concerns evaluating this properties. Would I value these properties like a rehabber or would I value them if I were to buy-and-hold? The answer seems obvious, but I want to make sure I'm using the right criteria when determining their value.
I've read so much about how to determine an offer price for a standard fix and flip (70% of ARV - Repairs = MAO) but there hasn't been much discussion on how that differs from valuing a buy-and-hold property. My initial stab is to package all four of these up and attempt to purchase so that rents would be 1% of purchase price (actually slightly higher to allow room for my wholesale fee).
My cocktail napkin math shows that rents equal $7,600. That means in order to get 1% rent, the end buyer would need to purchase at $760,000. If I take a 5% wholesale fee (just throwing out a number) then I would need to get under contract at $722,000.
Obviously there is much due diligence still to be done, but I need to give my prospect a call back this afternoon with a ballpark number to see if it's worth scheduling a showing around the current tenants. Can someone let me know if I'm close or way out of line with my initial assumptions/valuation techniques? Any critiques are greatly appreciated!
There has been a lot written here about valuing rentals. Look up the 50% rule or the 2% rule. One says monthly rent should be about 2% of the purchase price or higher. (Your 1% means you are paying too much) The other rule says expenses (not including financing) will be about 50% of the income.
In my area I would pay $250K for that portfolio if it was in very good condition. However my area is an exception. Rents are very high, prices are very low.
Thanks for the reply, Ned. Maybe I needed to be a bit more clear in my query. I'm pretty familiar with the 2% rule;however, from reading and experience, the 2% rule doesn't hold up in high value areas of which the San Francisco Bay Area most definitely is a part of. For these areas I've heard that 1% is more attainable and sought after. Is there much experience around valuing properties in a high value area like Oakland? While writing this I'm making an excellent case in my head for the need to find a mentor in this area. Still, any help/insight is appreciated.
Morning Bump. Would love to get others experiences evaluating rentals where the 2% rule doesn't work.