How To Determine Property Value--1st Timer
I am looking to make my first purchase of rental property as a personal investment, however, I am not sure how to determine what price I should pay for the property. I have heard different opinions and not sure which is right--for example:
1) You should pay no more than 10X the annual rental income
2) Take the monthly rental income, subtract utilities and multiply by 70, If the property price is greater than this, you are overpaying
3) Look for a positive cash flow within 5 years
4) It should deliver a positive NPV at your cost of capital
What is the right method? How do I determine what I should pay for a rental property? Any advice from ventrans would be appreciated.
idsfam,
First let me start our by saying I dont do rentals. Various reasons, but not important. You have to be a little more rigorous with your buy criteria that just a back of the envelope.
here is how we do it. We have a buy criteria that allow us to make an offer, if accepted or considered we do a full due diligence on the project profitability. There are a million outs if your due dili turns up bad.
If you want more specific, contact me via phone or email and I will send your our spreadsheet.
I use a formula that says 1%+ of the purchase price each month in rent is a good deal. Example:
4 plex
Purchase price: $310,000
Monthly gross rents: $2400
To be a good deal it should be $3100/mo. This formula has never failed me. Even when I re-run using a comprehensive deal analyzer.
I'm with Lassitermarketing. It has worked for me.