I’m presently working with a number of real estate investors looking to start their portfolio of properties. Many of them are new to this investment. Since I’ve been there and done that when it comes to Investment Properties such as Multi-Family Homes I have come up with a formula that lets me decide if a property is worth investigating further. I recently passed this formula onto my clients and thought it might be of help to others out there looking to get into this.
I start by looking at the total monthly income. Multiply this total by 12 which will give me the yearly rental income. I then use a multiplying factor of 7X – 10X this yearly rental income. The product of this equation would be the expected Sales Price of the property. When using the 10X multiplier I would consider a property that was in excellent condition, somewhat new or many updates, or has a great appreciation potential. A 10X multiplier will most likely be a break even property or slight positive cash flow. The lower the multiplier the greater the positive cash flow and the greater the deal. Of course once you determine a property is worth investigating further you would then need to visit the property to determine it’s condition as well as look into the overhead/expenses in owning this property.
If the vacancy rate seems high in the area that you are looking to buy in I recommend that you try to find something that is fully rented. If you find what you think is a good deal but it is not fully rented I suggest to my clients to give the vacant apartments a lower rental value. For example if there is a 3 Bedroom Apt empty and it would normally rent for $1500 p/m. I would give it a value of a 2 Bedroom Apt which might rent at $1200 p/m. I know if I were to get this property and advertised a 3 Bedroom Apt at a 2 Bedroom rent I would have no problem renting it.
Here is an example: 3 Family House with 2 Two Bedroom Apts and 1 Three Bedroom apt. On the market for $395,000. The 2 Two Bedroom Apts are rented at $1200 p/m and both have a 1 yr lease. The Three Bedroom Apt is lived in by the owner, potential rent $1500 p/m. 1200 + 1200 + 1500 = 3900 x 12 = 46800. 46800 x 7 =327600, 46800 x 8 = 374400, 46800 x 9 = 421200. Based on the fact that this property would fall in the 8.5 times the gross yearly rental income it would be worth looking into further. Even if the rental market was weak in the area which using my recommendation would bring the rent for the three bedroom apt down to $1200 p/m this still would be under a 9X property. If in structurally good condition and had some updates it would most likely bring a positive cash flow based on 100% financing, which we all know is not possible but it is still a good way to look at the property.