How to Identify a Purchase Price Range for Rental Property Anywhere

How to Identify a Purchase Price Range for Rental Property Anywhere | Blog | InvestingTE.com
How to Identify a Purchase Price Range for Rental Property Anywhere | Blog | InvestingTE.com

How are you working smarter and not harder when it comes to finding rental properties?

Is there a technique you use?

If there is, we’d love to hear your strategy.

Knowing if a property fits your buy-box and identifying those markets that support your targets are very important for finding deals.

No matter if you are renting traditionally for long-term, for mid-term or short-term stays, you should know your buy-box in any market.

We all know the income varies based upon whether you rent long-term, mid-term or short term.

However the comparable value of the property does not.

  • There will be a difference between a residential property and a commercial property valuation.

But, regardless of the property type, you should still know your buy-box.

Today, we will share a technique you can use.

Let’s get started.

Median Income

Macro Investments LLC: How to Identify Purchase Price for Rental Property Anywhere (Real Estate Investing Education)
How to Identify a Purchase Price Range for Rental Property Anywhere | Blog | InvestingTE.com

The first factor, you should know is what the median income is in the area.

Knowing the income level, allows you to factor in a rent rate that makes sense for the location.

Being that the median income is a median, you can create a high and low variance of 25% of that median value on each end. (Or use a percentage of your choice.)

Meaning, increase and decrease the median income by 25% to get a range of relative income levels.

Rent Rate

Macro Investments LLC: How to Identify Purchase Price for Rental Property Anywhere (Real Estate Investing Education)
How to Identify a Purchase Price Range for Rental Property Anywhere | Blog | InvestingTE.com

Now, use the median incomes gathered to equate the rent rates.

As a rule of thumb, eligible income for tenants is usually no more than 33.33% of their gross income.

Using the median income, and the high and low-end spectrums of that median income, create your rent ranges.

Now, you know the rent rates you can expect to charge.

  • Note: Be aware, that details can get more granular, as we know asset class affects rent rates. There will be variance based upon location, that you will only know when you’ve identified a potential asset.

The median rents will help you establish a base and then tweak their ranges based upon the investment’s opportunity.

Operating Expenses

Macro Investments LLC: How to Identify Purchase Price for Rental Property Anywhere (Real Estate Investing Education)
How to Identify a Purchase Price Range for Rental Property Anywhere | Blog | InvestingTE.com

Now that you’ve aligned median income and rent rates, you need to know your average operating expenses.

Property taxes, vacancy rates and property management expenses, are different in each location. 

So, there will be variance in your operating expenses.

However, using standards are ideal. 

  • Perhaps 7% for property management, and 5% for vacancy rates, are good starting points.

As you learn more detail about the location, you can adjust your metrics accordingly.

After identifying your operating expense ratio, you should have an idea of what it costs you to operate efficiently.

Deduct your operating expenses from your effective gross income.

  • Effective gross income is the income after vacancy. (EGI = GI – V)
  • See our article Real Estate Formulas 101 for better understanding of theses formulas and what they are made-up of by reading the article.

We are now getting very close to what your target purchase price will be for any property in your chosen area.

Capital Expenses or Deferred Maintenance

Macro Investments LLC: How to Identify Purchase Price for Rental Property Anywhere (Real Estate Investing Education)
How to Identify a Purchase Price Range for Rental Property Anywhere | Blog | InvestingTE.com

Whether an asset is turnkey or if it has deferred maintenance, makes a difference in how much you should expect to spend, to bring that property to an ideal condition (or to maintain it’s condition if already ideal).

  • Your exit strategy matters when considering this factor in evaluating your deals as well.
  • If you are looking to add value, to then refinance to recuperate your initial funds invested (or BRRRR), it is different than if you were going to simply buy-and-hold.

Regardless of your strategy, you will need to determine how much the expenses will be to get the property to an ideal state.

  • This amount can be factored into the CapEx, to repair over a longer time span or it can be incorporated in as a front-end cost to repair immediately.

Again, your strategy matters. 

The funding source dictates details of the entrance and exit-strategy’s.

Find your CapEx or repair expense and incorporate it accordingly.

Now that we have covered all expenses to help equate final value, we are now ready to determine our ideal purchase price.

Net Operating Income

Macro Investments LLC: How to Identify Purchase Price for Rental Property Anywhere (Real Estate Investing Education)
How to Identify a Purchase Price Range for Rental Property Anywhere | Blog | InvestingTE.com

Everything you have done thus far, has allowed you to determine a prospective net operating income (NOI).

  • NOI is the effective gross income, minus the operating expenses. (NOI = EGI – OE)

Being that you now have the NOI, you can now determine the purchase price using the value formula.

  • Value equals NOI divided by the capitalization rate. (Value = NOI/Cap Rate).
  • See our article Real Estate Formulas 101 for better understanding of theses formulas and what they are made-up of by reading the article.

You will either need to pull comps to get your cap rate or inquire with a local broker, so you identify the cap rate of the location.

Take your cap rate and use the value formula.

You now have the prospective purchase price for any property in that area.

You can use the range of rents we covered earlier in the article to align your purchase price range.

Conclusion

How to Identify a Purchase Price Range for Rental Property Anywhere | Blog | InvestingTE.com
How to Identify a Purchase Price Range for Rental Property Anywhere | Blog | InvestingTE.com

With the information you have, you are prepared to start shopping.

Run your searches in the area of choice using the target purchase price range you’ve identified.

Thanks for joining us today, faithful readers – future leaders.

Love ya and continue to strive for growth.

Please comment your strategies for identifying your target purchase prices in various locations.

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