Price Offer Formulas?
All
What formula do you use when making an offer on a property to ensure that you are not overpaying? I am interested in buying either multi-units and/or condos and renting them out. However, I am having difficulty determining how much to offer. I realize that every REI has their own preferences and/or requirements, so maybe some of you can share what works for you.
In other words, I am looking for a quick formula to determine the max price I should pay on a property.
Any suggestion and/or advice would be great.
Thanks
My rule of thumb is that I try to buy at 70% of retail value or less.
If you're buying rental property that means a 12-13 % cap rate or 7 times one years net operating income after all operating expenses but before the debt service.
If you are looking to buy and hold, sometimes paying over market is a good strategy. I was buying in a very highly appreciating market and I was willing to pay an additional $15K in order to get the owner to carry back a substantial note with very soft terms. My plan was to buy this and hold for a long time. This allowed me to acquire the property with little cash and a soft note that isn't due for nine years. This was two years ago and the property has appreciated at least eight times the additional $15K.
There are times when you may want to do what commercialking said which is to buy at 70% or less of FMV. This is what you might want to do if you are looking to turn the property quickly.
I use multiple types of formulas based upon the subject investment what type of investments are you going after?
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JohnMichael
I am looking to go with the buy & hold strategy if that is what you are asking. As I mentioned in my original post, I am looking for multi-unit income properties from 2-4 units.
I look to make $150 per unit. Let's say you have a property that is 100k that brings in $1200 a month gross. If you calc that out at 8% (I like being pessimistic) the payments would be roughly $740. Calc insurance at roughly $70 a month, an taxes at roughly $185 a month (for my area). Then calc monthly income x 5% for vacancies (again my area) which comes to $60, then repairs at 5% for another negative $60. Legal fees, advertising, etc AND they would have to be paying their own utils would put this at a mediocre deal that I would not do even though it is close to $150 per unit.
Hope this helps, but it probably will not work in CA.
Keep in mind that there is a big difference between buying a house for you and buying property as an investment.
Larger properties tend to be priced according to gross rental revenues.
There are no magic formulas for estimating the value of income property but I will share with you what I do.
Keys to my purchase of investment property are: (I review each one in depth)
History of Sales and Listings
Tenants and Leases
Local Market Conditions and Trends
The Neighborhood or District
Boundaries and Easements
Planning and Zoning
Access and Utilities
One big key factor for me is The Americans With Disabilities Act of 1990 (ADA), which became effective January 26, 1992, requires many types of commercial buildings to accommodate people who use wheelchairs, are blind or have other types of disabilities. You should contact your local building department or hire an expert in the field of ADA compliance for specific requirements.
I normally use what is called The Cost Approach when purchasing multi unit investments because it is a method of estimating value by combining the site value with the depreciated replacement cost of the buildings and other improvements. The cost approach can be useful for appraising properties which are unusual or complex, and when there are no comparable sales or income data.
I find that comparable sales are hard to come by with multi units as well as the income data provided in most cases is somewhat exaggerated.
I some times find that for some income properties, the sales comparison analysis provides me with enough information on the purchase because it uses units of comparison, such as price per apartment unit or price per square foot of rentable space.
I then determine the property's Net Operating Income (NOI). I then estimate the capitalization rate (Rate of return) that I could reasonably expect. NOI is the amount of the return and the cap rate is the rate of return.
I also want to know my Gross Operating Income
You take the Gross Scheduled Income this is the property's annual income if all units are rented and all of the rent is actually collected. You would subtract from this amount an allowance for vacancy and credit loss. And this is your Gross Operating Income.
Now I deal with my operating expenses but I deal with real operating expense not marginal expenses just for tax avoidance!
"An item must be necessary to maintain a piece of a property and to insure its ability to continue to produce income. Loan payments, depreciation and capital expenditures are not considered operating expenses."
Utilities, supplies, snow removal and property management are all operating expenses. Repairs and maintenance are operating expenses, but improvements and additions are not they are capital expenditures. Property tax is an operating expense, but your personal income-tax liability generated by the property is not. Your mortgage interest may be a deductible expense, but it is not an operating expense. You may need a mortgage to afford the property, but not to operate it.
Now I subtract the Operating Expenses from the Gross Operating Income and I have my NOI.
Now I have to deal with capitalization
A property’s simple capitalization rate is the ratio between its net operating income (NOI) and its present value:
Cap. Rate = NOI/Present Value
I use capitalization to predict value:
Present Value = NOI/Cap. Rate
It gives me the projected value in any given year and is equal to the expected NOI divided by my capitalization rate.
It all the numbers look good I buy it. "Welcome to my crazy world".
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Thanks a bunch for the replys.......good info
Investor mindset- Thinks in terms of ROI, how fast they get their initial investment, and afterwards how hard their money works for them.
lol i wouldn't bother trying to figure out employees as most of the time trying to understand thier thinking will cause your head to hurt. I've spen the past 6 year trying to figure out those that i work around and the owner of the resteraunt i manage out and it hasn't happened yet. So now i'm starting to "mind my own business". I'll help them by example hopefully its the only option i see left.