Valuing 2-4 Unit Properties Based on Rents

[Eric McAvoy]

Hey BP team!!

I've got a quick question for you guys. I'm looking at house hacking a 4plex in the coming months and the one I want is priced reasonably but the rents are way below market rent. 480k purchase price and $825 per unit but the area could easily get $1100-1300 per unit with some minor renovations.

With that in mind, is there a way to use the low rents to help bring down the purchase price? I know there are ways to get a value based on the rents but I can't figure out what it is. I've been looking into cap rate and NOI but most of what I can find is telling you how to find those numbers vs being able to get the value of the property based on the current rents. I think the seller is selling it based on what it could be, but I intend to pay for what it is, not what it could be.

If anyone has any insight as far as how to get a value of a property based on the currents rents that would be awesome!! 

[Jonathan Greene]

CAP doesn't work for 4 units and less, it's not the same type of evaluation because it's not a commercial product. You can use anything to negotiate down, but under market rents are pretty standard when you are buying an off-market multi-family. It's a pretty big spread between $825 and $1,300 so I would be real sure that you have the comps to back that up. Too many investors don't understand comps and look at all rentals in the area, but apartment rentals are not applicable or comparable to rentals in a multi-family home. You have to tailor your comps to multi rentals only and be very diligent about assessing how close they are to yours. If you miscalculate your expected turnover rent, it can kill you. It's also dependent on the leases of the tenants and likelihood of them leaving. Ideally for a four-plex, you would have one unit vacant on delivery to renovate it and then go step by step as leases end.