Valuations based on actual vs projected rents

[Steve Miller]

I am reviewing properties for my first purchase. I’ve educated myself here (thank you BP!) for buying a 4 to 6 unit building. My questions are:

The property details list the current rental rates and generously forecast "projected rental rates".These forecasted rates are higher than the prevailing GRM and typically are much more than a 10% increase in the current rates. When you are evaluating a property to determine sales price and valuations, how do you reconcile the current rental rates vs a projected rate? For the most part, I can see a fair 10% increase, that’s normal and in line with the market place. I’m also one who believes in a happy tenant is a long term tenant.

I would also like to occupy a unit in the building as my residence. Do you still factor in the “rent” of an owner occupied unit when calculating the value and other valuations?

Thank you

Steve

[Roy N.]

@Steve Miller

Ignore acts of fiction and hopeful dreams! ;-)

You are purchasing a cash flow based upon the current performance of the business, not what the business could be if it rained gumdrops and lollipops.

When underwriting a multiunit we request a minimum of 2-3 years financials (preferably from the Vendors accountant).

If you plan to occupy one of the units, you would still evaluate the building as if that unit were producing rent - depending on how you own the building, you will either pay rent or receive the equivalent value as a personal allowance.  However, you would naturally want the building to be able to {better than} carry itself based only on the remaining units.