I am extremely new to investing and also to the BP community. First I would like to say hello to everyone and thanks for being a part of this forum.
I have two questions.
The first question is in regards to evaluating a Multi Family Unit to see if it is a potential performer vs an emotional evader. I recently heard of an awesome formula that you can use to apply to any multi family unit up to a maximum of four units to determine if you are getting a great deal or not. I wanted to run it by anyone who is seasoned in this subject to get your feed back and opinion.
The formula is in regards to what you should offer for a particular multi family unit. First step was to make sure they are all currently being rented. Then I was told you multiply the total rent from the units by 12 and then multiply that number by 7. Then you decided to either add 10% if the property is determined to be in above average condition, take away 10% if the property is in below average condition or not to apply change if it is in average condition. Here is a rough example.
Lets say you are looking into purchasing a triplex and the rent for each unit was roughly $700. Lets say the unit was also in above average condition (add 10%). So you would take $700 x's 3, since there are 3 units, giving us a total monthly rent of $2,100. Then you would multiply $2,100 x 12 for a total of $25,200. Then you would take the $25,200 and multiply that by 7, which would equal $176,400. Because the property is in great condition you would add 10% ($17,640) to the $176,400 giving us our final asking price of $194,040.
I was then told that if the listing price was anything higher then that number to walk away and look for the right one that would perform. They said that using the above formula that out of 27 houses they ran numbers on, 6 of them would be worth going to take a look at. Out of the 6 they would take a look at 3 would go under contract and they would finally end up with 1 at the end.
I was curious to how that formula added up for everyone else.
i also heard that then you could apply 1% to the actual price of $194,040 giving you $1,940 per month as an amount of money it will cost to cover everything that you could think of on that property from, mortgage, insurance, vacancy, property management, and so on.
So is this a good rule of thumb? Has anyone ever heard of this? Just curious for your feedback. Again I have not yet invested so I don't know. This is just something I recently heard.
The second question is in regards to just a single family rental. The above formula works ONLY on multi units. Can anyone give me a formula for single family rentals as well as if I was going to do a new construction for a single family rental. I am asking this because I would like to have some type of formula for new construction and single family rentals, so i don't get stuck in the emotional side of the deal but the side that actually performs. Again I really do appreciate any and all help as when you read my profile, I am just starting out and very hungry to learn all that I can.
Thank you so much!
