Roy... I appreciate your opinion and yes the income approach is extremely important. My advice is related to market conditions. What is someone else willing to pay for this building if I bought it and decided to sell it next month? The exit strategy worst case scenario determines how far under water this building really is in today's market. If 10 other people more than 1 mile but less than 2 miles away bought the same building for more than im paying it's likely I do in fact have equity. Residential appraisers prefer to only go 1 mile and six months back in time to appraise the building. If the same exact building sold 9 months ago 1.2 miles away and three more just like it sold for more this this property I can assume the value is there. In chicago there are 100 more sfr sales to one 3-flat so when I buy them to hold as cash flow I go outside residential appraisal guidelines to see what's happening near my property.
In summary if you look around and nobody is selling them or the sales prices are significantly less than what I'm paying I pass on the building. If however I see comparable sales and more than three sales in last 12 to 18 months I may decide to buy with little or no equity solely based on the cash flow knowing I never want to sell it. Here in chicago for 2-flats I absolutely make sure I have equity in the building because there are more sales meaning more of them in the market to unquestionably tell me the real value.
Every market is different so these assumptions may not hold true for 3-unit buildings in other markets but I know they are extremely popular here in chicago and easily sold even if they have some negative equity. I wish I could buy more of them but personally I need to see more comps in the surrounding area to justify the prices therefore I buy 1 (3-flat) out of 50 (2-flats). Also note here in chicago many of the 4+ units are purchased and rehabbed in cash and never hit the mls. Buyers are hedge funds snatching up everything sold via commercial brokers or bank direct. Take care!
