Decreased rents and the values of rental properties

[James Z.]

Hi, we are having some questions about the rental properties markets and any inputs are much appreciated. Rents have decreased significantly in the CA SF Bay Area. How that affects the values and purchase prices for rental properties there? Do buyers evaluate rental properties based on their rents? Thank you!  

[Rick Martin]

James, it depends on whether we are talking commercial multifamily (5+), or single-family/small multifamily (2-4 units). If it is commercial multifamily the yes, because value is determined by NOI (net operating income), which is rents - expenses being divided by the prevailing cap rate of the market. So if rents go down, NOI goes down, and thus the value goes down.

If it single family / small multifamily, then it is based on the comps of the property. Housing values, for now, have remained up, whether they are a single family residence or a rental. Having said this, a wise buyer of small multifamily should evaluate as a commercial property, to see how they can operate at the current rents.