Max offer on a Texas SFH

[Michael Cerny]

SFH in established, nice, stable Houston neighborhood.

Asking Price: 170k
Rent Comps: 1650/month (19800/year)
NOI: 9603 with 50% rule after 3% vacancy allowance

I'm assuming 25% down with 6% on the balance.
House is currently a primary residence and shouldn't need much work to be rent-able.

Not sure if the 50% rule is sufficient. Taxes and insurance are high here. Taxes are 4500 and insurance is probably 2000 or so.

What would you offer on this property?

[Bryan Hancock]

If NOI really does equal $9,603 annually (from your post I am not sure this is the case, but I'll use it for an example) in the long run you should offer roughly:

NOI / YOUR "Overall Capitalization Rate" = Offer

"Overall Capitalization Rate" = (LTV debt ratio x mortgage constant) + (LTV equity ratio x equity constant)

Mortgage Constant = i / [ 1 - (1 / (1 + i)^n) ] = 6% / [1 - ( 1 / (1.06^30)] = 7.2%

Assumed Equity Constant = 20% (What you require...adjust if needed and rinse/repeat)

=> Overall Capitalization Rate = .75 * .072 + .20 * .25 = 10.4%
=> Rough Offer = NOI / Overall Capitalization Rate = $9,603 / .104
=> Rough Offer = $92,336

This analysis is really better for commercial property where valuations are more mechanical. For a SFR you really need to use a financial model where your terminal cash flow assumes some appreciation potential based on your best educated guess and a known exit date. From there you can adjust a few knobs and come up with a better answer than the analysis above gives. If your exit date is far in the future you should probably account for amortization in your analysis too.

If you're in to the whole BP thing where you ignore appreciation potential, tax shields, and amortization of loans in favor of a rote 50% rule of thumb analysis that yields "cash flow" and capitalizes it without the time value of money then the analysis above should get you pretty close without elaborate models.

Note that there are some financial models in the resources tab you may want to check out.