Hi all, I am new here. Found this great place on Google. A newbie question about estimating the price of condo as a rental property.
A wholesaler has a condo for sale to his clients. 1290 sf, 3 bed/1.5 ba. Market value ~$95k on Zillow, rental value $900/month. He asks for $66k and said he will list it on MLS for $80K if none of his clients takes it. He updated it with granite counter top.
I drove around the condo and talked to people I met there. Looks like a good area for retal therefore I am not warried about the rental income. Most people living there seem to be working class. I didn’t go inside since I don’t have an appointment set up yet.
After calculation, the NOI = $6340. If desired cap rate is 12%, then the house is worth $6340/12% = $53K. If desired cap rate is 15%, then it’s worth $42K. Both are significantly lower than $66k. But if I take the 66K the cap rate is only less than 10%.
The condo market value is flat in the past 10 yrs. Therefore I don’t see much potential for appreciation. Therefore I mainly invest for cash flow. I don’t expect the condo value to increase significantly in the next 20 yrs.
I am going to negotiate the price using this NOI statement.
The question is, is it correct to calculate the house value using the above NOI/Cap rate method? Are there other ways to estimate the value? I can’t seem to think of a better way for something that’s invested only for cash flow.
Another question: can I apply for a home equity loan on an investment property such as this one? I am thinking of cashing out my payment after the purchase, since the market value is way higher.
Thanks for helping!
Hi,
I do not generally recommend Condo or Townhouse purchases as rental properties unless you buy the unit cheap enough that the property will pay for it’s self within 5 years and you don’t mind owner financing a sale as an exit strategy.
The problem with condo’s or townhouses is that mortgage lenders take issue with properties that have more than a 10% non-owner occupied ownership ratio and will deny making mortgage loans to buyers of any unit because the property has to many rental property unit’s!
Generally speaking I do not use “Cap Rates” for residential properties 1-4 units as a “Cap Rate” is a commercial property term! In residential property the 50 / 50 rule basically applies which means cost’s of ownership are 50% and debt service / positive cash flow are 50%, which means the property you describe at a $66k purchase and finance at 5.75% on a 30 year fixed mortgage of $385 per month or $4620 per year, this will leave positive cash flow of $65 per month or $780 per year for the door!
I would personally only buy this property if it were available for less than $27k with rents being equal and the intention to use all positive cash flow / debt service dollars to pay it off in less than 5 years.
With HOA fee’s and a association board to deal with condo’s or townhouse’s are not always a deal.
GR
Thanks a lot Golf Rover! I understand most of your points, but could you explain the 50/50 rule in more details? Does it mean you should have 50% percent of your income as NOI?
Hi,
Gold River, Gold River, you know the yellow metal that sells for $1640 an ounce!
50% Debt service and positive cash flow
50% Expenses
GR
sorry my bad, was a typo. i know tin used to be more expensive than gold. and thanks for explanation. nice to know you!