Question: I've never purchased real estate as an investment before. I acquired a Quad Multifamily recently in Lowell Mass. My closing is on March 7, 2014. It took me about 5-6 months to find it. I picked this property through an MLS. While going through realtor.com, I found this property. I have an agent who sent me the MLS update daily, but it was not fast enough. I don’t think she really knows much. She does not know the concept of cash flow, cap rate and never helped evaluate a property worth for me. I am a cash flow guy. It is my priority and equity is secondary. Looking back, it was easy for me to determine cash flow, but I have a hard time determining the value of the house. For example, I don’t know if the house is selling at the market rate or has any equity. I looked over the lender appraisal report, and see how the appraiser evaluated the house worth. It is complicated. He could not find much 4-Fam in my town, so he went to towns close by the used those houses for comparison. He picked 4-Fam with similar living space and number of bed rooms.
My question is:
How do you evaluate the house worth? Is there any reliable website that I can use to determine if the house has any equity at the given sale price? I need help – step by step how to perform research and good reference websites.
Answer: Hi Chan, It’s actually very simple. When it comes to “Income Properties”, the buyer sets the value. I wouldn’t even worry about comps because there’s probably not many 4 unit properties within a 5-10 mile radius with the same square footage, amount of bedrooms & bathrooms in each unit, acreage, operating income, operating expenses, maintenance issues etc etc etc. Plus, just because the other guy didn’t do his due diligence and overpaid doesn’t mean that you have to!
I suggest finding a minimum cap rate that you are willing to except and make the offer based on that. So let’s say your minimum cap rate is 10% and you find a property on the MLS listed for $300,000. You do your due diligence and find that the property’s average net operating income is $24,000. $24,000 / $300,000 = .08 or 8% (The Cap Rate). So from here you would just adjust the offer to $240,000 to give you that 10% cap rate.
With that said, there is a big difference between $300,000 and $240,000 so before I submit that offer, I'd try to get some background info on the seller and check public records to get an estimate of how much they owe on the property to see if my offer is even feasible. Also, if you find yourself getting rejected too often, then you're probably asking for an unrealistic cap rate.
As for any helpful websites, there are many out there that will give you comps, but I don't know of any off the top of my head that will help with this method but as you see the math is actually pretty easy.
If you have a different opinion or just something that you'd like to add, please feel free to leave a comment below.
This is not legal advice. Please contact an attorney for professional legal advice.
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