Multi Families

[Karl]

What is the fomula to see if the income per year is in line with the purchase price of a 7 plex. 157,000 selling price income is only 33,000 per year before expenses. How do U explain out if income is not suitable to the purchase price.

 

[Frederick R. Ruffell]

Karl there are a number of ways to develop a Capitalization rate which you could use in your analysis and then there is the gross rent multiplier which is basically SP /Gross Income for you comps. This will give you a wide range if you use actual rents and they are below market, or a tighter range if tyou use market or the actual rents are at market. However if you are not already proficient in these techniques you might have a competancy issue. I have never appraised anything over 4 units as I have no experiance and no mentor for that type of property.

 

[Geoff Hatcher]

Karl,

"157,000 selling price income is only 33,000 per year before expenses"

Is the $33,000 income actual or market based on rent comparables?
Should always use market rent in addition to the subject's historical income and apply a market V&C to determine your EGI. I have purchased units from long term owners in wich the rents were considerably below market and increased the rents to reflect market rent soon after purchase.

Expenses should also be based on the subject's historical expenses and market expenses. Cap rates should be extracted through market sales and can be further supported through the Band of Investment or DCR method. Depending on what the auditors appraised value is, your may also consider using a tax additor to account for any increase or decrease in property taxes.

Your sales comparison approach should reflect a GIM analysis, price per unit, per square foot analysis, etc.

Depending on your market area, investors in the area may or may not recognize or base their investment decision based on the income approach and may just look at the Gross potential income. Depends on the sophistication of the market for $157,000, 7 units buildings.