Do the rules still apply to vacant properties?

I have a question.

I have a property that is listed at about 40% of what it is worth if it was full and rented well. I was wondering would that rule still apply if the property is vancant. I know the rule is. You divide the rents by 2 subtract what you want a month for cashflow. Then based on your estimated interest rate you find out what your price should be. But what do you do when the properties are vacant?

I found some that are vacant, so what is the formula you use when the they are empty?

Hard to tell from your question whether you are a buyer or a seller, and the property type.

As a general rule, a single family dwelling structure is valued by the marketplace. Comparable sales set the market value regardless of whether the property is occupied or vacant.

Sellers don’t use potential income to sell a single family dwelling either. They start with the market value of the property established by recent comparable sales and adjust for amentities or features specific to their property. Occupancy or vacancy is not a factor.

Multiplex properties generally use a capitalization rate calculation to establish value to the buyer because, for larger multi-unit properties, comparable sales information is not readily available.

That 50% rule (I think that is what you reference in your post) is not used to determine the value of a property. The 50% rule is used, when you don’t have any idea of your overhead expenses, to estimate whether a particular property will cash flow for your financing terms.

Perhaps you are really thinking about Mike Rossi’s 2% rule which tells you that a property will usually cash flow if the market rent is not less than 2% of the purchase price even if you purchase with 100% financing. Again, this is not a rule for the value of a property, but a rule of thumb to quickly assess whether a specific property is likely to generate a positive cash flow for a rental property investor when the market rent is known.

If you want to use the 2% rule to determine your maximum purchase price, then multiply the market rent by 50. The result is the maximum price you should be willing to pay and still have the property cash flow with 100% financing. Whether you are able to purchase at that price or lower will depend upon your negotiating skill and the seller’s urgency to sell.

I see what you are saying. I would be the buyer in this situation. I was trying to figure out how it would work when the property is vacant. But I get what you are saying.

Wooddell,

I calculate the maximum purchase price exactly as you described. If the property is a vacant SFH, then I am just as happy to get it in a vacant condition so that I can put my own tenant in it. If it’s a multi-family property, then obviously you need to pay less for the property as it will cost you some amount of money to hold the property while you’re filling it back up. As the number of units in a building or complex increases, the cost of taking over the building/complex increases. Furthermore, if the building has been vacant for many months, you need to determine if there are any restrictions on re-occupying it. In some areas, a building that is vacant for a specified period of time (6 or 12 months, etc), then the building can revert to current zoning regulations. The 12 unit building you bought might now be zoned only as a SFH!!! OUCH!

So, to answer your question directly - Yes - a multifamily building is worth less if it is vacant and you need to understand any legal ramifications of it being vacant (such as zoning issues).

Mike

Just semantics. A property is worth whatever the marketplace has established for the property, usually based upon comparable sales. What you are willing to pay for the property based upon your cash flow requirement may be a lot less than the property is really worth.