How to calculate property value based off rental income?

1

Hi experts
Could use your insights, I have a property with 2 detached units on a single lot.
Each unit rents for $3100, so total annual rental income around 74.5K.
Is there a simple formula to calculate the property value based on this amount?
My understanding is that similar SFH comparables don’t work for such a property…

2

Most people use cap rate to value properties based on rental income.

Cap rate = net operating income / value

So to get the value, you do income / cap rate.

Most bay area cap rate is < 5%. The lower the cap rate, the higher your property value. So let’s use 5%:

74.5K / 5% = 1.49M.

This article has some data for Bay Area multi unit values:

http://www.paragon-re.com/Bay_Area_Apartment_Building_Market

3

Thanks so much, wow that is a treasure trove of information!
so, after reading more it seems I have to account for monthly expenses too before calculating cap rate
annual rent = 75K (round up)

  • tax = 8K
  • gardening = 1.5K
  • insurance = 1.8K
  • prop management = 6K @8%
  • repairs/remodel cushion = 12K ($500/mo per house)
    Net = 46K
    I haven’t even includes vacancy rate as the units havent been vacant so far.
    So with 5%, that only comes up 900K then, quite a big difference from just using the rental income without adjustments.
    Am I right in the calculations?
4

To give some context, we used to live in the front unit and rent out the back and had to move out of the bay area earlier this year. I’m mulling if we should sell it in the next couple of years to at least gain the tax exemption for the owners unit or keep it a rental and let it pay for itself…

5

Looks correct. But 5% is really high cap rate for core Bay Area. Most are < 4%.

Valuing properties based on cap rate is most often lower than using the comps method, aka how you value residential SFH etc.

6

In SV, cap rate is about 2-3%.

7

2% ? The lowest I have seen is 3.x%.

8

@hanera the cap rate would also depend on the number of units right? I imagine multiplex’s to have the highest cap rate while SFR have the lowest

9

Unless you need the money or plan to use the money on other investment that can provide more return, I’d just keep the property and collect the rental income.

10

Not in my neighborhood. When I first bought it, gross yield is 2.8%, cap rate is less than 2%. I found out, much later, from the neighbor that the seller thinks I’m stupid and overpays for it. I did, no choice, too many bidders, about 18 I think. Even the first tenant* who rent thinks is not worth it. Five years later, gross yield is about 5% (original purchase price), 2.8% (current price).

*After three years, he relocated to Seattle and had bought a house there recently. Before he left, he told me that I was lucky to get the house at that low price. Stupid and lucky is good :grinning:, better than smart and unlucky.

11

I can still find 6 caps in South Lake Tahoe for sfhs

12

Thanks all for your input, I’m realizing now, its better to hold on to what I have. I’m an “accidental landlord” and not sure if I can go chasing for a better investment…
How do you property investors refinance or take a HELOC from rental property? If I use a cap rate of 3.5%, the value is around 1.3m, and I would have around 50% equity. Wish I could tap into that somehow to buy another property…

13

My understanding is
total RE return = appreciation + rental ie cap-rate
So, if the cap-rate is high such as in S Lake Tahoe likely the appreciation is low and the reverse is true in hot areas like SF or SV.
In my case our property is in Pleasanton, not as hot as SF/SV or parts of Berkely/Oakland but in the middle tier with good schools, desirable community and a cute downtown

14

You can. Many banks do cash-out refi for rental properties. But the max may only go to 70%. Ask around.

15

The difference between a 3 and 6 cap is huuuuge as the Donald would say.Your $1.3m would provide double the income in Tahoe…where appreciation has been 10%… .BA investors are betting only on appreciation. …they often are lucky to be cash positive. …Probably good to have some money in higher cap areas…My IRR in Gilbert was projected at 27% before the fire

16

I recommend 1031 exchanging into a higher cap area…like maybe to where you live now

17

Is it a regular rental? Or vacation rental?

18

However for cash out the entire loan amount eg 70% would end up at a higher investment-properaty rate isnt it?
Right now, we have the lower rate as its partly owner occupied…

19

Vacation rentals and multi family in Tahoe can be 8 caps…6 caps are possible with the lower end sfhs ffor long term rentals.