# Does this sound logical? - Posted by NB(ID)

Posted by NB(ID) on February 23, 2000 at 08:12:09:

Thanks Dave T. Sounds like excellent advice. I’ll try it!

Does this sound logical? - Posted by NB(ID)

Posted by NB(ID) on February 22, 2000 at 21:43:37:

Monday I had the day off work so I traveled 48 miles to the nearest town (population about 3,000). I took a realtor out to lunch and we discussed how difficult it is in a town this size to come up with comps. This is a picturesque little town and there are no “bad” areas. I visited several apartment houses and a duplex. This is how I compared the buildings:

I took the total square feet of the duplex and divided by the asking price = \$31 per sq. foot.

Apartment buildings:
Building #1 (appeared to be perfect condition)
been on the market 6 months
Rents: \$475, \$330, \$265, \$390, \$265
\$61.43 per sq. foot

#2 (needs new windows and possibly more)
been on the market 6 months
Rents: \$280, \$280, \$250
\$33.28 per sq. foot

#3 (needs some serious TLC)
Rents: \$485, \$360, \$300
been on the market 20 months
\$25.72 per sq. foot

#4 (has 5 apartments on top and a store
on the ground floor)
Rents: \$250, \$225, \$225, \$225, \$150, \$800
been on the market 1 month
\$28.89 per sq. foot

Although I haven’t taken expenses into accounts here, does this sound like a legitimate way to compare apples and oranges?

Thanks:)

Re: Does this sound logical? - Posted by Dave T

Posted by Dave T on February 22, 2000 at 22:55:54:

Whether your approach is logical I will leave to others to answer.

If you plan to hold these properties for rental income, what would be logical to me is to take annual expected income and subtract your annual expected expenses, adjust for vacancy, contribute to a maintenance reserve, and pay the taxes and insurance.

After all this is done, then what is left over is your Net Operating Income. Now determine the maximum amount you can afford to pay given the financing available to you. Your operating income must be large enough to support your debt service and have enough left over to give you a positive cash flow.

I suggest taking your Net Operating Income and dividing it by 1.25. The result is my suggestion for the maximum amount you should contribute to debt service. When you have this number, you can easily determine how much loan financing this income can support.

Now it is easy to determine the maximum dollar amount you can pay for the property and still generate a positive cash flow. Consider the condition of the property and adjust your maximum price accordingly.

Using the cash flow approach to estimating value, you set a maximum price to ensure that you don’t pay more than your cash flow can support.