"Rental Property Valuation: Analyzing an Investment Property"

By: Al-Yassa Al-Mahi


Multifamily rental property evaluation is clearly a serious 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 not easy 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 proposition 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 amend the purchase price or make some other arrangement. Similarly, a deficient inspection report may force the seller to either make repairs or adjust the price.

GENERAL PROPERTY VALUATION GUIDELINES

Rental property appraisal is primarily determined by rental revenue, location, and condition.

bigger units with more bedrooms control higher rent. So all else being equal, you'll choose properties with multi-bedroom units. An added advantage is that 2-3 bedroom units tend to have a more constant tenancy. Conversely, 1-bedroom apartments tend to draw more of a transient population, which means the turnover is typically greater.

From a position standpoint, multifamily rental properties in older, lower-middle income neighborhoods by and large 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 ideal target property will be older (50 years or more) and will have cosmetic deficiencies or simply look "old." These properties can provide great value for your buck. Conceptually, it's sort of the opposite of curb appeal.

COSMETIC VS. STRUCTURAL

common property valuation rule: cosmetic problems = good, structural problems = bad!

By "cosmetic," I'm referring to things like:

Peeling or old paint
ancient carpet
busted light fixtures
Damaged kitchen cabinets
Torn vinyl flooring
Accumulated junk or clutter
An untidy lawn
Overgrown shrubbery
filthy siding
Old appliances
weak bathroom fixtures & towel racks
Old doorknobs
Old outlet & switch plate covers
broken 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 dodge all of these issues at all cost. Run the numbers to determine feasibility. If you can obtain a multifamily rental property on the cheap, then perhaps you'll be able to have enough money a new roof, an electric upgrade, or even mold remediation and still come out ahead.

It all depends on the purchase 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...

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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.

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