Sell price in function of rent price.

[Celso Agustìn Solano Pachón]

The Price-to-Rent ratio in the city of Baltimore-Maryland is 13,69. With that number in mind, I am wondering if it will be feasible to do the following.

1.  Buy a house for $400.000 near a university. I have seen some houses offered at this price, near some universities in the Maryland area.

2. Invest about $200.000 in order to get inside that house, 5 bedrooms each one of them with private bath, and also improving kitchen, living room, laundry room, gardens, roofs, sidings, floors, etc., until everything looks nice and new.

3. Renting each one of these 5 bedroom-bathroom units, by $1.200 a month, to 5 students. That numbers makes a $72.000 income per year.  As I have seen in some places, it´s hard to find such kind of housing near universities. I also saw that the few houses modified in that way, keeps rented the whole year.

4. Here appears again the Price-to-Rent ratio, to consider selling the house to some investor. According to that ratio, the ask price could be something near $985.680 (ratio =13,69 x  year income=$72.000). 

The question is.  Will it be possibly that somebody pay such a price (near $1mm) for buying the house once it gets 5 contracts for the whole year, in a neighborhood where the non-remodeled and non-rented houses can be bought by $400.000 like the one of the example?

In other words, the commercial price of the house can be multiplied by 2,5 doing what is explained here?

[Scott Trench]

Quote from @Celso Agustìn Solano Pachón:

The Price-to-Rent ratio in the city of Baltimore-Maryland is 13,69. With that number in mind, I am wondering if it will be feasible to do the following.

1.  Buy a house for $400.000 near a university. I have seen some houses offered at this price, near some universities in the Maryland area.

2. Invest about $200.000 in order to get inside that house, 5 bedrooms each one of them with private bath, and also improving kitchen, living room, laundry room, gardens, roofs, sidings, floors, etc., until everything looks nice and new.

3. Renting each one of these 5 bedroom-bathroom units, by $1.200 a month, to 5 students. That numbers makes a $72.000 income per year.  As I have seen in some places, it´s hard to find such kind of housing near universities. I also saw that the few houses modified in that way, keeps rented the whole year.

4. Here appears again the Price-to-Rent ratio, to consider selling the house to some investor. According to that ratio, the ask price could be something near $985.680 (ratio =13,69 x  year income=$72.000). 

The question is.  Will it be possibly that somebody pay such a price (near $1mm) for buying the house once it gets 5 contracts for the whole year, in a neighborhood where the non-remodeled and non-rented houses can be bought by $400.000 like the one of the example?

In other words, the commercial price of the house can be multiplied by 2,5 doing what is explained here?

Great question. The “rent by the room” strategy is viable, often works well in college towns, but will create additional expenses and headaches over renting to a single tenant.

so, nothing wrong with your approach, just discount the rent by a little more vacancy and factor in more expenses and damages with five college kids.

To your second question, no, the increase in income will not increase the value of the property. 

residential property, like single family houses and 2-4 unit properties are valued based on comps - one 5 bd 3 ba house will be valued the same as a similar property nearby, regardless of the differences in current income they generate.

you have to move into commercial property, or larger multifamily to start seeing valuations based on cap rates.