How to calculate price based on rent?

anyone?

$475,200

Alanhart how did you figure that out? Is there some generally accepted formula?

There's an SE thread about that every week or so, but they usually turn into arguments.

You might want to look at MIT's OpenCourseWare: http://ocw.mit.edu/courses/urban-studies-and-planning/11-433j-real-estate-economics-fall-2008/

Alan used 12x the annual rent in his calc.
ie: fair price = 144 * monthly rent

BTW, this TOTALLY varies by region.
Some places sell for 4x rent roll.

this is a real-life scenario I could potentially be looking at. House in a rental community in NYC suburb being rented at ~$3,300/mo and they are looking to sell. Wanted to know what the realistic asking price should be.

Q: is the 144 * monthly rent based on something, or is this just an empirical observation?

NYCROBOT...the answer can be different for different people and markets. Generally....ask yourself what are the total AFTER TAX costs of ownership, including potential appreciation/depreciation and use of capital, versus what it costs to rent. The inputs for cost of capital, borrowing rate, tax deductibility, and so on differs for each individual situation.

@Robot You can't use the same metrics. Read a real estate investors book before you do anything. Also, a rule of thumb is to make sure rents are greater than PITI.

Captive914: sorry to sound like an idiot, but what is PITI?

@ everyone: can you give me an upper boundary value price(in your opinion) that you would pay to buy something renting for $3,300 a month. Assume the place is good quality in a nice safe location with good schools and assume interest rates stay very low like they are now (so you're not making jack by keeping the money in the bank and 30-year mortgages stay historically low). Are we talking $450K? $475K.

This discussion is just not the way to think about this, in my opinion.

I own a house in upstate New York that easily rents for $1,450 a month. I paid $78,000 for it two years ago, it might sell for at most $90,000 today.

By alanhart's formula, I should have paid $208,800. Or I should be able to sell it for that. Neither is true.

The selling price of a property is determined by the local market for properties of that kind at that time.

Supply and demand.

That's all there is to it. The books can write anything they want, try showing the book to a potential purchaser or seller and see how far that gets you. The fancy biz school formulas are nice, it's fun to say "cap rate" and "cash-on-cash profit" or whatever jargon, but for a small scale investment like this, in my experience they don't mean much. (I am a very small potatoes investor so I do not mean to suggest at all that I know how the Donald Trumps of the world make these decisions.)

The rent roll is only relevant to the extent it affects the demand for that building by other *investors*.

An appropriate price for the property of interest here depends entirely on the surrounding market, and we don't even know what state your property is in, so really, no one here can answer your question.

However, one formula that is used by small scale investors is the 1% rule. So a house that costs $400,000 should rent for at least $4000 a month to ensure a decent profit. I personally use this rule of thumb and it works for me.

In most of the NYC area I'm aware of, rents are too low relative to the cost of ownership to interest me as a small investor.

By that formula, a house that rents at $3,300 a month should sell for no more than $330,000.

One more thing: Some vacancy is supposed to be part of the calculation. Usually sellers quote the current rent, which may or may not reflect the current rental market. Very important to check this out.

Ideally you set rent so the place is vacant 5% to 10% of the time, there is a sweet spot that maximizes profit. If a place is never vacant, then the rent is too low--I actually am that kind of landlord, and I know I pay a price for this.

Karla Harby, VP
Charles Rutenberg Realty
kharby@crrnyc.com

Don't forget the tax deduction, and never-ending price appreciation.

Especially in Long Island City.

HAHAHAHAHAHAHA!

You do realize that the numbers you quote represent an extraordinary return on your investment. What's the catch? Why not buy 10 more houses if you can sustain this return?

Karla,
Curious here. Your 1% rule equates to 8.3x annual rents. If this is your idea of a good "rule of thumb" for an investor (buyer), then how would you go about advising a seller of a similar property?

Karla: "The selling price of a property is determined by the local market for properties of that kind at that time.

Supply and demand.

That's all there is to it. The books can write anything they want, try showing the book to a potential purchaser or seller and see how far that gets you. The fancy biz school formulas are nice, it's fun to say "cap rate" and "cash-on-cash profit" or whatever jargon, but for a small scale investment like this, in my experience they don't mean much. (I am a very small potatoes investor so I do not mean to suggest at all that I know how the Donald Trumps of the world make these decisions.)"

Oh dear. This is exactly the 'know nothing' type of analysis which brings less than able buyers to the table. Unbelievable that people actually trust folks like you with what is many times the largest financial decision of their life.

I know two people paying about $2400/month in rent on the upper west side in Manhattan. These two apartments are maybe 3 blocks away from each other.

#1 has a first floor 1 BR / 2 bath converted to two bedrooms, probably about 650-700 square feet. The first floor faces a (large) air shaft and has full use of the air shaft as private outdoor space that can be used for BBQs and parties. The second bedroom is "fake" and has no light. The apartment, as converted, has about a 20x11 living room, and gets little direct light. The building is a walk-up with few amenities.

#2 is a low-floor enormous 1 BR / 1 bath (about 950 square feet) with a private terrace and multiple walk-in closets. The windows face north, but have an open view of the skyline and therefore the apartment gets very nice light. The living room is about 25x12 with an attached 7x12 alcove dining room and a renovated kitchen. The buildings has many amenities, including a doorman. (As per building rules, the terrace may not be used for BBQs.)

The sale value of #2 is at least $175k higher (if not more) than the sale value #1 even though the rental price is the same. Nobody will pay $700k for #1, but apartments similar to #2 have sold for over $700k. My take-away from this is that supply-and-demand for rentals and supply-and-demand for sales are comparing apples and oranges.

"However, one formula that is used by small scale investors is the 1% rule. So a house that costs $400,000 should rent for at least $4000 a month to ensure a decent profit. I personally use this rule of thumb and it works for me. "

I'm not in the business so I've never heard anything one way or the other, but this doesn't seem right. $400K house should rent for $48K per year? I kind of doubt that.

I understood there to a similar rule of thumb amounting to 10% of sale price in annual rent, so that same scenario would be $40K, not $48K.

But of course with any of these rules it depends on owner's operating costs: tax, insurance, upkeep, etc.

to *be* a similar rule

Price-to-rent ratios are similar to price-to-earnings (PEs) in the stock market. They vary over time based upon interest rates, growth expectations, and psychology.

(Can also be viewed as rent-to-price ratios and earnings-to-price ratios which are similar to cap rates and earnings yields.)

Manhattan price-to-rent ratios have generally varied between the high single-digits (early 1990s) and the mid-twenties (recently). Most properties I've been interested in have been in the low-twenties which I consider pretty excessive based upon my view of likely intermediate-term trends in rents, risk,
and continuing bubble-like psychology. (Lower interest rates, though, may be a plus for valuations...unless they signal a double-dip recession.) On a short term basis prevailing demand and supply will, of course, impact price-to-rent ratios. On a longer term basis high price-to-rent ratios will attract builders to put up new condos rather than rentals and thus bring the two markets into equilibrium.

Keep in mind that even after you own an apartment free and clear, you still have to pay maintenance and taxes.

Price-to-rent ratios are much lower in many other parts of the country which makes the buy-decision a lot easier there.

The bulls will argue, of course, that Manhattan is different. Maybe. But they also said Internet stocks were different in 2000.

Paris is a beautiful city. But what is the relevance to being a beautiful city when the germans are about to roll in?

Fwiw, I'd pay a premium to rent instead of owning, bf the shitstorm hits, but that's just 'me.

I am like minded with w67 on this item. To take possession of a relatively illiquid asset (with high transaction costs no less), I would pay a premium to rent. Throw a crappy economy in the mix and they premium goes up...

I'm curious as to what w67thstreet thinks a fair price for a good place/good location in suburbs on NYC should sell for if the rent is $3,300/mo.

challenge, kharby, re your upstate house--ill buy 50 of those tomorrow if they can be bot for 78k and easily rented for 1450/month--17.5k/year--you should borker properties up there--youll be rich!!!

Is this thread serious? There have been so many discussions about this on these boards, just do a search.

The ratio is rent times 12 times some number which many people have varied opinions, and which is not constant and is affected by factors such as interest rates, tax rates, etc. People argue whether it should be 12, 15, 18, 20, etc.

I posted a thread a few month ago about gross rent multiplier in New York city.
It's interesting and shows you todays prices are still inflated:
http://streeteasy.com/nyc/talk/discussion/18274-a-little-bit-of-history-gross-rent-multipliers-in-new-york-city-over-time