I have been asked to publish this again since it is so valuable.
You can take a bunch of sophisticated courses on income property and learn how to do fancy spreadsheets or you can use my sneaky and quick method.
First of all, don’t bother to do comps. The value of an income property is in its income, not the comps.
I have figured out a quick method to determine whether or not you even want to go further.
First figure out what pgi is (potential gross income)
Costs will range from 20 to 50% of that no matter what seller says. Don’t even think of believing them.
Take into account:
1.age of property
2. Any deferred maintenance
3. What remodeling has been done- especially roof
4. Who pays utilities
After you figure that number you have the noi- net operating income.
Then figure out how much money you want to net each month. The amount that is left is the amount the property can afford to pay in a mortgage payment.
Add 25% for a down payment and that is the most you can afford to pay.
The only difference is that rule is if there is owner financing. Then I would figure out what the cash on cash return is? How much do I have to invest, and what am I getting for that. Do you want to deal with tenants and toilets for a 5% return? I think not, unless you can figure out some way to improve the property and to increase the cash flow. That is what will make the property worth more.
A great free app to have on your phone to quickly calculate is the quick10B. It’s a free financial analyzer. You have 4 iterms:
– # of payments (usually 360)
– int rate
– present value
– monthly payment
If you have 3 of the 4 you can calculate the 4th. Good for playing around with balances to get desired profit or how much to pay based on what you
The numbers will NEVER be what you estimate anyway. I started my investing career with apartments and never took a dime out. (We did remodel our house and charged the expenses off so it wasn’t a total loss.) Also dumped it on my ex in the divorce with his phone number given to the tenants so it was worth something.
You should also ask these questions:
- What is the rent roll?
- Are all occupied
- Are all paying
- Do they have leases or are they month to month
- Is anyone section 8
Hope this helps.
