What should I ask for a building that is apprasised at $500,000?

Question

The building is appraised at $500,000. Rental income will equal about $5500 per month. Considering the time value of money and interest rates what would an investor be willing to pay? Please have some idea of what I am asking before you answer. Thanks!

I have an investor asking for a price. The $500,000 was an appraisal after the building was complete. It is a three unit commercial property with two renters and one open unit.

This is a new commercial building with leases. The investor is an investor not someone who is going to be making payments. The rent alone will pay for the property in about eight years. I came here thinking someone might have some concept of cash flows and the rate of return. My mistake.

Answer 1

typically investment property value is determined by the following formula:

monthly rent income X 12 (mo/yr) X 10 years
5500 x12=66000x10=660000 asking price. up to and including that price can be your asking price.

Answer 2

Now, I don't have all the info and I may be assuming certian key factors. Most investors I work with wouldn't buy the property for nearly that price as the income generated isn't really comparable to alternative uses of their money. Here's a general rule that investor use. The net income after the normal expenses is usually somewhere around 70-75% of the gross revenue. (rents- taxes, insurance, maintenance, vacancies, etc....) so, basically he'll net about $3800 monthly on the optimistic side, about $45k annually. This isn't that bad but the problem comes in when you talk about financing, most investors try to use other peoples money as much as possible even if they are loaded with cash. They will typically put down max, 30% and finance the rest. That means at 500k they would finance about $350k. After the mortgage on that your talking a very small mortgage. The next thing they look at is the price per unit, with 3 units that's about/unit 166k. Can the investor obtain individual units in your market for less than that price and if so, what would the unit yield in gross rents. that's a huge factor because as singley units, they'll be easier to move, typically. Here's some things that could work in your favor. Now, the one factor that would help you out is to be very aware of your zoning and if it allows for future improvements, ie, more units. If it allows for expansion or has the zoning to add more income producing units on the property, an investor may be attracted to the potential and you may get a higher price. This may be a key factor in your marketing of the property. I hope this helps somewhat, If you can give a bit more info the property may be able to help more. Also, if the current rent is below market and the investor can maximize the portential as is, then that may be another weapon for your negtiations.

Answer 3

This depends entirely on the market in your area, how fast you want to sell and many other factors. Generally people ask very close to the appraisal value but this is a very saturated market right now so it's going to be more difficult to sell, also investors generally like to go in with equity so if you ask 500k for a 500k place they have no equity to start with and it will not be considered a good investment unless the particular area is a hotbed of real estate. Also you have to consider that they are going to want their payements to be significantly under what the income is so they can be making money if possible, that's the best way to get it sold. Generally speaking when I look for an investment property for people I research the general area find out what the projected market is and I never consider a property that wouldn't have 25% equity. Now all investors have different strategies but I've never made a mistake yet and every investor I work with will swear by me.

Answer 4

$499,999.99. That way they will think they are getting a deal in the 400K range. Shhh. It is a secret marketing gimmick. It works every time on me, in any store that sells stuff ending in 9.99. I know if I add a penny to the price it will be $50, or $500, but 49.99 or $499.99 just sounds so much better, and I really don't mind advertisers and retailers thinking I am stupid. So, if you think your build is worth $500,000, ask $499,999,00

Answer 5

From the number you provided, you will be cash flow positive.

May be it is a good buy. However, I am surprised seller doesn't ask more though. Why is that? Are any units vacant or have bad tenants? How much are maintenance costs and insurance, which will bite into the revenue.

Please also consult with tax accountant or CPA. I wouldn't trust
appraiser and realtor entirely, because appraiser can pretty much give you a number that realtor insisted. And realtor doesnt' get pay until properties are sold.

Good luck!

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Rent vs. Buy as Housing Market Continues to Slump

As housing market slump, it is easier to calculate "Rent vs. Buy" scenario. Because "appreciation" is no longer a factor.

Mortgage payment consists of two parts: interests and principal. Interests are like rent, which doesn't add to the equity to your house. It simply disappear as your pay it.

If interests portion of the mortgage payment is roughly equal to rent of equivalent property, then it is a decent buy.

For example, let's buy a $500,000 condo with 0% down and apply interests only loan (just like renting a place). Mortgage payment would be $3250/month. It is a bad buy, because you can enjoy same property for $2000/month.

Please note that I assume the tax benefits from home cancel out fees from home association and property tax. For more accurate calculation, consult with your CPA or accountant. But NOT your realtor, whom will say anything to get the deal to go through.

And again, if you like a particular property, then paying more may be reasonable. You are the only person who can decide how much more premium you are willing to pay.

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How to value a property during market downturn?

Housing market continues to slump. Now we can calculate true value of a property easily. As price decline, we don't need to guess and factor in the potential price appreciation while calculating home value. Without the guesswork, figures are more accurate.

Let's use following example:

Today, a typical 15 years old, two bedrooms condo/townhouse is priced around $500,000 and $550,000 in Sunnyvale, California. Rent for similar condo/townhouse is $2000/month.

If you are a home owner, $2,000/month in rent means $20,000 a year in profit ($24,000 per year in rent, minus $4,000 maintenance costs). A $20,000 income is equilevant of owning $400,000 bonds or CDs, because current yield of 30 Years U.S. treasuries are 5% (5% of $400,000 is $20,000). Bank CDs have similiar yields.

In our example, the two bedrooms condo/townhouse is 20% to 25% overpriced. They should be priced at $400,000.

It is interesting to note that if we redo the calculation from buyer's perspective instead of seller's perspective, the figures are even more shocking.

Mortgage payment consists of two parts: mortgage interests and mortgage principal. The interests portion is similar to rent. If you pay interest, it disappears and doesn't add equity to the property. To fully simulate characteristics of renting, we assume buyer will apply for a zero down, interest-only loan.

It turns out that rent of $2000/month is equivelant to mortgage payment of a $340,000 loan at 7.0% APR. And comparing $340,000 loan to $500,000 or $550,000 price tag, from buyer's view, the two bedrooms condo/townhouse is 30% to 35% overpriced.

One may ask, why is there a discrepancy between two perspectives of the buyer and owner?

The discrepancy is a result of 2% differences in interest rate that buyer borrow comparing to yields of bonds and CDs that owners would get. We understand that buyer would always pay more. That is the premium of buying to own. However, looking from home owner's perspective, current housing market is probably 20% to 25% overpriced. We recommand investors to wait for a better entry point.

Answer 6

Is that the property value from the city, that taxes are based on, or is it the current appraisal of what it would sell for?

Answer 7

In most states either your realtor or appraiser could tell you what to ask. I heard it's hard to get an investor right now.

Answer 8

I am selling chunks of land for family.
When you are at that range, consider an agent.
Get one that knows what the heck they are doing.
yes it costs but so does missing 100k for a 50k commision (deductable)