Trying To Value Multi Family Properties
I am working with a realtor to purchase a multi-family property. As part of the process, I have been trying to value the propert using comps, income and other methods.
The subject proprty is about 1500 Sq. Ft less than any other multi-family property that has sold within the past year. I want to take this into consideration when valuing the proprty but the realtor has indicated that for income producing properties, the area of the property does not matter, just the rent.
According to this realtor, an 8000 Sq. Ft. property is priced the same as a 10000 Sq. Ft. property as long as their rents are similar. And usually, rents are based on the Number of bedrooms and bathrooms.
Have you found this to be true? Does the size of the income producing property have no impact in its value? And waht about rents, have you found that the rents are typically based on #of rooms and bathrooms rather than on unit sizes? Does this apply only to multi family properties or to SFH as well?
I find this very interesting because if this is the case, then I will have to re-think the ways I have been valuing properties all this time.
Thanks in advance.
JS.
im guessing the comparables are less desirable locations? But, yes, for the same income stream, investors will likely pay the same amount (assuming the same risk and quality of property).
Bigger units will rent for more and units with more bedrooms and baths will also rent for more...they both influence the rent.
That is what they taught in college - rents determine the value. You also have to factor in things like what utilities you are responsible for, maintenance expenses, groundskeeping, parking, etc. The expenses may be different between this property and the comps so you want to find the Net rents and compare apples to apples.
Anything and everything that affects your present and future CASH FLOW should be considered when determining your offer price.
Confirm all the rents and obtain copies of all the leases along with all repair receipts and utility bills. Complete a thorough inspection of roofing, electrical, plumbing, and mechanical systems to ascertain the likelihood of large maintenance or repair expenses in the near future. Confirm that there are no outstanding code compliance violations at the building and zoning department.
Ignore the realtor’s suggestions and the asking price, build your offer on numbers that will make the deal work for you. Start with a low ball offer and have a price ceiling before you make the offer. Insist to be present when the offer is made.
Generally speaking Income properties market value are a function of the buildings NOI (Net Operating Income). Once you determie this number..Gross rents less vacancy less operating costs. Then it is just a function of Cap rates in the area. In other words a 10 cap property (which is the standard of a good deal). Will say if NOI is 16,740 per year then at a 10% cap the value is %167,400...or if the Cap rate in the area is lets say 7. Then the value is about $239,142. Now the condition of the property is obviously a factor. The nicer the property the closer to "true" market value.