Quote:
Originally posted by aflex
i'd recommend if you buy a complex, when you are a little more experienced in being a landlord. like someone mentioned, you could lose your shirt.
for example (taken from a book):
You own a 12-unit building. You underprice each unit by $25 a month. The cap rate is 9%. How much does this underpricing error cost you?
Lost income = $25 x 12 units x 12 months
= $3,600 per year
Lost building value = $3,600 / .09 = $40,000
You've lost $40,000 of value just by underpricing $25 per month.
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An appraiser would adjust below market rents to the market (i.e. would add the missing $25 per unit per month) and cap that net income at 9.0%. Then he would deduct an income shortfall to the loss of income for the term of the lease.
For example the property has 12 units with an average rent of $475 per month and an average expiry of 6 months. Say the market is at $500, then $500 would be used in determining the potential market value of the property. Then he would would deduct from that value $1,800 (12 units x $25 below market X 6 month before you renew the lease). thus instead of a loss of $40,000, the actual lost would only be $1,800.
Or the appraiser would increase the cap rate to say 8.75% to consider growth rent potential.