6flat help with new value after rents raised please

[Nick Versetto]

I'm looking at a 6-flat that's listed for 600k with gross income of 68,400.  My question is if I raise the rents and bring the gross income to 86,400 what's the equation I use to calculate the new value?  

The reason I ask is because I'm going to attempt to see if the seller will hold a second and once rents are more in line I can cash out and pay him off.

Thanks,

Nick

[Brian Moore]

You can't use the property net operating income divided by list price as a "market cap rate". You first need to have a market basis for the value of the property to know if the list price is close to market value. It could be 20% too high. Also, it is quite common in listings to underestimate expenses.

A market cap rate can be calculated from closed transactions where you have reliable information on income & expenses. Unfortunately, that information is not readily available. I suggest using the GIM because you can calculate this on most closed transactions without much time and effort.