HOW WOULD YOU FIGURE VALUE BASED ON INCOME PRODUCED

[Stephan Haas]

I am seeing lots of 1-4 units that are up for sale, what is a way to figure their value based on the income they produce. Say, gross $1250 monthly....whats the value of the investment?

[Roy N.]

@Stephan Haas 

Sadly residential properties (1-4 units) are almost exclusively priced on comparable sales.  In contrast, the commercial world values properties primarily based on the cash flow produced.

That said, we always look at a rental property based on its cashflow and expect a certain level of cash-on-cash return based upon the asset and location. For a quadraplex in a C class neighbourhood, where appreciation would be unlikely or marginal, we would expect a higher CoC rate of return (12% or better) once the property was rent-ready.

We set the level of return we expect is based upon our opportunity costs and the "headache factor" (the greater the headache factor, the higher the return we require).   While we try to be systematic, there is a great deal of subjectivity is setting our acceptable return on a given property.