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Posted on October 21, 2009 by Al-Yassa Al-Mahi | Posted under Leasing Renting
"Rental Property Valuation: Analyzing an Investment Property"
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Despite the slow market, it is still complicated to find a "steal" in this day and age. A good starting point for negotiations is often 20% below the list price, with a target purchase price of 10-15% below market value. But even after your proposal is accepted and the property is under contract, the property value still may be reduced via the appraisal and/or the home inspection. For example, if the appraised value comes in too low, you may have to ask the seller to fiddle with the purchase price or make some alternative arrangement. Similarly, a deficient inspection report may force the seller to either make repairs or adjust the price. GENERAL PROPERTY VALUATION GUIDELINES Rental property valuation is primarily determined by rental revenue, location, and condition. Larger units with more bedrooms control higher rent. So all else being equal, you'll want properties with multi-bedroom units. An added benefit is that 2-3 bedroom units have a tendency to have a more constant tenancy. Conversely, 1-bedroom apartments tend to pull towards you more of a transient population, which means the turnover is typically greater. From a location standpoint, multifamily rental properties in older, lower-middle income neighborhoods regularly offer the greatest bang for your buck. Plus, your tenant universe is typically larger in these areas. Avoid densely urban or very low income areas. In terms of condition, the best target property will be older (50 years or more) and will have cosmetic deficiencies or simply look "old." These properties can grant great value for your buck. Conceptually, it's sort of the reverse of curb appeal. COSMETIC VS. STRUCTURAL all-purpose property valuation rule: cosmetic problems = good, structural problems = bad! By "cosmetic," I'm referring to things like: flaking or old paint Old carpet Broken light fixtures Damaged kitchen cabinets Torn vinyl flooring Accumulated junk or clutter An messy lawn thick shrubbery filthy siding Old appliances frail bathroom fixtures & towel racks Old doorknobs Old outlet & switch plate covers Damaged mini-blinds Broken windows Any other "quick fix" you can think of Structural issues, or issues where you must proceed with extreme caution, include: A severely cracked foundation or walls Galvanized piping Leaning chimney Outdated electric (i.e., knob & tube wiring) Severely sloping, cracked or warped floors Pervasive asbestos Rotting wood in the frame Lead paint A long-running leaky roof Buried underground oil tanks HVAC problems Mold Note that I am not saying to evade all of these issues at all cost. Run the numbers to resolve feasibility. If you can buy a multifamily rental property on the cheap, then maybe you'll be able to have the funds for a new roof, an electric upgrade, or even mold remediation and still come out ahead. It all depends on the acquisition price, your property valuation conclusion, your level of experience, and the strength of your stomach. Use my free inspection checklist to help show the way (note: I'll post it on my website). PROPERTY VALUATION "SQUEEZERS" TO AVOID And finally, here's a list of things that'll kill property value...avoid them! Properties with serious structural issues or that are poorly constructed. Properties where all units are of the single-bedroom variety. Properties that show "economic obsolescence," such as those with very short ceilings, or those with many bedrooms but only 1 bathroom for example. Twins, condos, row homes, etc. These types of structures usually do not appreciate as much as detached structures. Properties with wells and septic systems. These systems could create a lot of problems and added expense down the road. Properties that do not have separate utilities. I've literally seen tenants crank the heat up to 90 degrees F in the winter but leave the windows wide open. The only utilities you as a landlord should be paying are water and sewer. Stay tuned for more info... About The Author: Washington DC Metro area, as well as Baltimore and Philadelphia. Al-Yassa currently instructs private clients on how to acquire and manage Business Credit to fund their real estate deals, developing land projects in Pennsylvania with partners, and has become one of the first persons in the country to be awarded the designation of CLO (Certified Lodging Owner) by the American Hotel & Lodging Association. |
Tags: AL-YASSA, AL-MAHI, AISLEE, JACKSON, MOGUL, CASH, FLOW, REAL, ESTATE, MULTI, UNIT, PROPERTY, INVESTING, COMMERCIAL
