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So You Want to be a Landord? Analyzing Potential Properties....

So you want to be a landlord?

 

So you've decided you want to be a landlord. You've picked your niche and you've found a couple potential properties. But are they going to be money makers?

 

Valuing income producing properties is very different from non-income producing properties. Even a single family home should be analyzed based on its cash flow. Therefore traditional methods of Comparative Market Analysis are not useful for income producing properties.There are essentially five methods of valuing income properties.

Price per Unit

This is a great "in the field" analysis. If you're looking at a 6 unit apartment building that's selling for $180,000, then the Price per Unit is simply $180,000 divided by 6 or $30,000. This is a great way to quickly compare properties in similar areas but have more or less units. This is great for your very basic analysis...but obviously a deeper analysis is required.

 

Price per Square Foot

Very similar to the price per unit, to compute P/Sq Ft. you simply divide the price by the number of square feet.  So our 6 unit building with a price tag of $180,000, was 5,000 sq ft... that means the price per square foot is $36. For income producing properties...I don't really like this method. There are simply too many variables to be considered to simply use a price per sq foot method. For non-income producing properties...this method still works.

 

Gross Rent Multiplier

Gross rent multiplier is another good field analysis tool because it's easy to calculate.  Just divide the property's price by its expected gross income. So our $180,000 6 unit building has a gross yearly rent of $46,800($650 per month per unit) and a gross rent multiplier of 3.9.  Again this is a great method of comparing several buildings of varying types and sizes.

 

Cap Rate

To dig down even further than the last 3 methods...you need more detailed rent information and cost information. Cap Rate takes into consideration the costs and income of a potential property.  Cap Rate uses Net Operating Income(NOI)  instead of Gross Income like we use in the Gross Rent Multiplier. To get to the NOI, we simply subtract all operating costs(taxes, insurance, owner paid utilities, lawn service, trash removal, expected vacancy,etc) from the yearly income and dividing it by the purchase price. So using our example again, our $180,000 6 unit building has a gross income of $46,800....but we have $7200 of yearly expenses. So our NOI is $46,800-$7200 = $39,600...so our Cap Rate is 22%. The only difficult part is really drilling down the actual operating costs.

Cash Flow

For most beginner investors...Cap Rate is pretty useless.  What really matters to the beginner investor is "Am I going to have have anything left after I make my mortgage payment?". The calculation is very similar to the Cap Rate. But we are only looking at real $...not percentages. To do this we need to know our expected mortgage payment. Then simply subtract your monthly rent, taxes, insurance, owner paid utilities, vacancies, lawn service, etc. Whats left over is your cash flow. Does that end number match your requirements? Some investors only want to break even, some want $200 per month per unit of free cash flow. That's for you to decide...

Analyzing rental properties really isnt difficult. Most of it can be done sittig in your car in front of the subject property using the calculator on your cell phone. Before long-doing the calcualtions in your head become second nature and you'll quickly be able to compare properties with confidence.

 

Also Check out:  So You Want to be a Landlord? Pick a Niche...

 

 


 

Mike Hogan

Associate Broker

RE/MAX Commonwealth

(804)503-0811

RVARealtor1@gmail.com

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Comment balloon 4 commentsMike Hogan • August 16 2009 10:42PM

Comments

Hi Mike,

This is a very good post for anyone considering becoming a landlord! Hope you had a wonderful weekend!

I hope you'll remember me if you learn of anyone moving to "The OC" and I will do the same!

 

Best regards.

Michael Caruso, Broker ABR ABRM CRB CRS GREEN GRI

2007 President, Orange County Association of Realtors      

 

www.MichaelCarusoRealEstate.com

Posted by Michael A. Caruso (Surterre Properties) about 8 years ago

Mike Excellent post - having done commercial real estate I am capable of making that assessment  Art

Posted by Art Kruschka, Manassas Woodbridge Dumfries Real Estate Sevices (Administrative Manager) about 8 years ago

Thanks for the breakdown, I can certainly use that with my investors.

Posted by Charles Stallions, 800-309-3414 - Pensacola, Pace or Gulf Breeze, Fl. (Charles Stallions Real Estate Services ) almost 8 years ago

Michael- I'll definitely think of you if I have anyone coming out that way. I actually have some friends there now...Newport Beach area. I'll keep my ears out for you.

Art- Thats awesome. There are many investors- especially new investors that are intimidated by the simple numbers.

 

Charles- Thats awesome!  I hope business is going well for you.

Posted by Mike Hogan, MBA (The Hogan Group at Keller Williams Realty) almost 8 years ago

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