“Rental Property Valuation: Analyzing an Investment Property”
Multifamily rental property estimation is apparently a crucial component of your investment strategy. If you’re a buyer then you’ll have to “run the numbers” to determine value. Very important, because if you overpay… you lose.
Despite the sluggish market, it is still hard 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 offer is accepted and the property is under agreement, 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 fine-tune the purchase price or make some other arrangement. Similarly, a bad inspection report may force the seller to either make repairs or alter the price.
GENERAL PROPERTY VALUATION GUIDELINES
Rental property assessment is primarily determined by rental revenue, location, and condition.
bigger units with more bedrooms command higher rent. So all else being equal, you’ll want properties with multi-bedroom units. An added advantage is that 2-3 bedroom units have a tendency to have a more stable tenancy. Conversely, 1-bedroom apartments tend to appeal to 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 mostly 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 perfect target property will be older (50 years or more) and will have cosmetic deficiencies or simply look “tired.” These properties can supply great value for your buck. Conceptually, it’s sort of the opposite 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:
cracking or old paint
smashed light fixtures
smashed kitchen cabinets
Torn vinyl flooring
Accumulated junk or clutter
An unkempt lawn
dilapidated bathroom fixtures & towel racks
Old outlet & switch plate covers
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
Outdated electric (i.e., knob & tube wiring)
Severely sloping, cracked or warped floors
Rotting wood in the frame
A long-running leaky roof
Buried underground oil tanks
Note that I am not saying to avoid all of these issues at all cost. Run the numbers to clarify feasibility. If you can buy a multifamily rental property on the cheap, then perhaps you’ll be able to afford a new roof, an electric upgrade, or even mold remediation and still come out ahead.
It all depends on the buy 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…
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.