Buying or Selling a Home/price

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Expert: Jim Root - 6/16/2010


Question
I am thinking of buying an investment property and have recently seen a house with 4 units. Are there some guidlines as to how much I shuld pay compared with the rental income? I think I have heard the word "capitalization" before. Is this relevant?

Answer

Hey JOE--

CAPITALIZATION is defined as the conversion of income into value.So, I guess it's relevant, but doesn't help you much.

There are several METHODS an Appraiser can use to convert income into value--the one most appropriate for a Four-plex is called the GROSS RENT MULTIPLIER (GRM) system. Here, like the Sales Comparison Approach used on Single Family/1 Unit Dwellings, the Appraiser finds 3 or 4 similar Fourplexes that have sold over the past 6 to 12 months, and in similar neighborhoods to that of the "Subject."

Dividing the Sale Price of each of these "Comparable Rental Properties," by it's annual gross rental income provides the Appraiser with a  different GRM for each of the "Comps."

Example: Annual Gross Income of one of he "Comps" is $30,000,GRM is 6.67. Estimated Value is acquired by mulitplying the GRM by the Annual Gross Income of the property.Fair Market Value is $459,000

Go through the same process with each of the other 2 or 3 "Comps" that you've acquired GRMs on.You have then established a "Value Range." Another example: Comp #1 $459,000 /comp #2 $509,000/Comp #3 $435,000

So you've got a Range of:

$435,000
$459,000
$509,000  

The Appraiser would then "Reconcile" these "Comp Values" by one of several methods, usually based on his/her knowledge of the local rental market, it's inventory and it's potential Buyers and/or Renters. Maybe he/she'd just "average" it out/round it up--

                   $475,000 Estimate of Fair Market Value
                       based on the GRM Syste

GOOD LUCK!

JIM ROOT  

Buying or Selling a Home

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Jim Root

Expertise

How to select the right Real Estate Salesperson & Loan Officer--ones who will serve your best interests! House-hunting tips & suggestions on selection of the home best for your family needs. Introduction to the Home Buying Process & all the "Players" involved.What is of utmost important to the Homebuyer? Real Estate Contracts & Negotiations, Appraisal needs, Title Co. involvement, Home Inspection issues& the Closing/Escrow systems, etc. Whatever your question, the answer will follow, whether from personal knowledge or research! Gale, shown here with me, has been a Real Estate Office Administrator, licensed Realtor & has served as my Research Assistant over the years!

Experience

Over 30 years as a "Real Estate Professional." including Real Estate Marketing & Sales, Appraisal work, Mortgage Banking & as a Realty Officer with U.S Dept. of HUD's FHA Homeownership Division in Alaska, Washington & Idaho! Some experience in Montana, California, Utah & Nevada markets!Knowledge of National Markets by continuous Research!

Organizations
Former member of Nat'l Ass'n of Realtors (NAR) & Mortgage Bankers Ass'n of America (MBAA). Currently with National Association of Review Appraisers & Mortgage Underwriters (NARA/MU).

Publications
Published in various local, state, regional & national Real Estate-related magazines & newsletters!Co-author of various Govt. publications on Homeownership, Appraisals & Mortgages while with HUD/FHA.

Education/Credentials
Associate Degree in Real Estate Studies plus: Numerous Real Estate-related Courses conducted by the U. S. Government & Private Industry over the past 30 years. Bachelors Degree in Mass Communications, Masters Degree in Education/Teaching

Awards and Honors
Professional Designations: Certified Residential Originator (CRO) from MBAA, Registered Mortgage Underwiter (RMU) & Certified Review Appraiser (CRA) from NARA/MU. Outstanding Peformance Awards for 10 of the 12 years with HUD/FHA & numerous Sales/Listing Awards while a licensed Real Estate Agent.

Past/Present Clients
No longer selling/listing Real Estate, nor Appraising properties, nor working in the Mortgage business, this "Real Estate Pro" serves as Director of a Company that provides Professional Development Seminars & Workshops to the "Real Estate Industry" and provides free (as needed) & fee-paid (on a sliding scale) consulting & inspection services to members of the general public.Your questions will be answered without "salesmanship" & with your best interests in mind!

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