Author Topic: Evaluation of Real Estate Method  (Read 302 times)

jwright

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Evaluation of Real Estate Method
« on: August 31, 2017, 12:14:45 PM »
Thoughts on this -

Investor is contemplating selling rental real estate. He believes our area is nearing a peak market.  To evaluate he thinks - if I sell for $X, my cash flow is $Y.  If I continue to rent, it would take me 12 years to make $Y cash flow.  His base line is 10 years.  Less than that, might as well keep renting.  More than that too long to wait for the money, should sell.

I am having trouble articulating why I don't think this is a good evaluation method.  It doesn't take into account continued appreciation if you don't sell the property (or continued rent increases).  Or the potential earnings on the cash flow if it is re-invested. 

FireEngineer

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Re: Evaluation of Real Estate Method
« Reply #1 on: August 31, 2017, 12:26:39 PM »
Assuming x is the dollar value of the properties. Most landlords are looking for 1 to 2 percent of x per month as income. Setting aside half for maintenance  [and ignoring leverage]. Results in net cash flow [y] of 12 [months per year] x .005 or .01 x X.

Based on 12 years of y to get x. You are saying y = x/144.

If y is net cash flow [and not gross rents] this is in line with the norm. If y is gross rents see which properties are outside of 1% rule and may be candidates to sell.

jwright

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Re: Evaluation of Real Estate Method
« Reply #2 on: August 31, 2017, 02:36:28 PM »
$X is selling price, $Y is cash after paying off debt and selling expenses.

How many years does it take me to get to $Y while renting out the units?