Expected CAP rate for Residential Properties?

[Shawn Clark]

I've got a client that might want to sell a house with three units in Baltimore. Total rent $1,850. They want to sell it occupied.

What kind of price, based on income alone, is typical? Will people pay $185,000 for that?

I realize some people are looking for rent that is 2% of price/cost, but I've always thought if you could get 1% in a decent area you were doing pretty well.

What say you?

[Immanuel Sibero]

@Shawn Clark

I apologize, I think my response was incomplete and therefore ambiguous. I should have said "the income the properties generate is insignificant in determining the value of the properties". Of course the context here is 1-4 unit properties.

I agree that as an investor, income matters. As a matter of fact income is the only thing that matters, income is what investors pay for. But when it comes to 1-4 unit properties, investors are constrained to recent sales of comparable properties which are not based on income. Within this market, there is another class of buyers - owner occupants! This class of buyers purchase the properties for reasons other than "income" (i.e. good school districts, desirable locations, emotions, etc).

In your Baltimore property example, if the "comps" support $200k, obviously you would list it at $200k. But if the recent "comps" have been trading at $150k, would you list it at $185k because it's bringing in $1,850/month rent? I suppose you could list it at $185k, but do you think people will pay it? This is what I meant by "the income is insignificant in determining price/value... for 1-4 unit properties"

Cheers... Immanuel