A big dream for many people, when thinking about planning for the future and how to invest, is to become a landlord or owner of rental properties. While most are not necessarily interested in handling the day-to-day property management functions, investing in rental properties can be a very successful venture.
Some people end up owning property that was passed down through family and become landlords by default. Others may convert their primary residence into rental property when they purchase a new home for their growing family. In most of these cases, the majority of the properties are single-family homes, and not necessarily properties that were built as investment vehicles like multifamily properties of two or more units. Because of this, their market value is based more on the comparable sales of similar homes, since a single-family home’s target market in a sale reaches the broadest pool of potential buyers.
In comparison, a multi-family property’s market value is heavily influenced by its capitalization rate. Simply put, the capitalization rate is determined by dividing a property’s net operating income by its sale price. The resulting number is the investment property’s capitalization rate. When considering a sale or purchase of an investment property, this number is an important factor.
For example, if you wanted to sell a 4-plex in Portland, it would be important for your broker to research what capitalization rate is common in recent sales of similar properties. Assuming that most comparable properties sell with a capitalization rate of 5.0, and the property’s annual net operating income was $50,000, you could calculate a recommended market value of $1,000,000. NOI ÷ Cap Rate (represented as a percentage) = $50,000 ÷ .05.
Identifying the capitalization rate and using your property’s net operating income to determine a potential sale price is one of the best ways to accurately price a multifamily investment property. Of course, factors like deferred maintenance, location, city zoning changes, and buyer or seller motivations will also play a role.
If you have a duplex, triplex, or other investment property and would like to receive a free market analysis, get in touch with us today!
