1) If you plan on getting financing you are going to need to get an idea of the market metrics like
CAP, GRM, Price per unit, Price per square foot.
Otherwise how are you going to know how much can be financed and how much money you need?
In addition you need to find out the market rents for similar properties and expenses. The best way to do this is to 1) call the owners directly and 2) talk to brokers who specialize in those niches and sold/listed the properties you are comping out.
You should know all of this before you even go shopping for properties. If not you'll never know if a deal is good or not when it is sent to you and you'll either buy something that was a bad deal or pass up a good deal because you don't know what you are looking for.
As far as buying a property based on current numbers or market numbers are just a few pieces to the puzzle. It's all just part of the theory of proper investing and an opinion.
For example I can pay a higher than market price based on a cap rate for a property that is under performing as long as I know I can increase my NOI and come out better than buying a property with a market CAP at a market price.
The reason you want to know the CAP rate and other metrics is you have to start with the fundamentals of analyzing investment properties and those metrics are where you start.
A lot of people say you can't look at cap, you can't you at grm, you can't you can't you can't.
Well those are general statements and are usually further down the line, but you need to start somewhere.
First you need to figure out what you are trying to accomplish when buying an income property. Start with general ideas and start filtering them down into specific measurable items.
Step 1 - Your experience level, money, credit, do you need a partner?, are you getting a loan or seller carry
back or some other creative financing mechanism.
Step 2 Based on the criteria above start with Size, location, condition, down payment, return expectations
Step 3 At this point you should have narrowed down what you are looking for (if you don't narrow down your searches you'll chase your tail or at least shoot your eye out.
Start looking at see if you can find any properties that matches your criteria. If not go back to the drawing board to see if your expectations are realistic.
I used to get people calling me all the time in San Diego looking for 8 CAP rates. Well that was a waste of time so at that point you either move to a different market, adjust your expectations or wait on the sidelines in the hope that the market will change from a 6 cap to a 8 cap.
When you have established your criteria and started looking you will THEN learn what the market is for the different metrics including rents, expenses, cap, grm etc.
Once you have learned the market when a deal comes across your desk you will know if it is a deal or not
So how do you come up with your offer price.
1) know the market. If you don't how do you expect to be able to negotiate well. If you only know what you wish for without any type of reality check you will most likely waste everyone's time. I see this with new investors all the time by thinking because carlton sheets tells them to make 50% off offers it flies. Well it may occasionally but most of the time it ruins your credibility and any chances of coming to a successful close.
Know the market by asking the questions up above and driving and surveying every property that has sold in the last 12 months, pending, active, expired and canceled.
Take notes on the properties like condition location etc. Then call the agents who sold/list the property and find out more information.
Do a rent survey in the area to find out if the rents are market or below market. Find out what the expenses should be in the area.
Now you can apply those numbers across the board to come up with true values. If for example you see something under rented and selling at a 7 x grm you can apply market rents and see what the actual grm is.
By knowing these things better than the other side you can come back to them with an educated counter based on some facts.
If you then also try to look at the negotiations from there point of view you. Why are they selling, whats important to them (not always money). How can you help them achieve that...
Put all that together and it gives you a better idea how to value the property you are buying and how to negotiate that price.
btw - if you are expecting a 15% cash on cash and the market is only 7% hopefully you figured that out way before you started putting in offer because the likely hook of you achieving that is remote.
