HOW DO I VALUE A RENTAL PROPERTY?

Recently I began working with a couple planning to purchase a small apartment building in Chicago as an investment. They plan to live in one unit and rent out the other.   We walked thru a Logan Square 2 flat building after work. The building was “winterized” with the electricity turned off.   So we crept through, using flashlights and cell phones to light the way.

They asked me a few good questions, like “Is this a good building?” and “How much will the apartments rent for?”   What they were really asking is “What determines value in income property?”

I just emailed them a building analysis worksheet, so we can plug in the numbers on the building, and see the bottom line. Value is all about rental income, expenses, and deferred maintenance.   A building has greater value when the rent taken in covers the expenses (mortgage, insurance, common utilities, and taxes).   That is the obvious answer, and the formula that the mortgage lenders use.   Feel free to contact me for the building analysis worksheet.

In Chicago, heat is a political issue. Do you know that the city dictates the minimum temperature that landlords must provide?   I shared with the couple that it’s not easy to determine beforehand whether a tenant will be happy living in a man cave, or whether they are of the hothouse variety.   Since winter weather can vary greatly from year to year, a building that has individually controlled heat with renters paying for their own heat generally has greater value.   It’s fairly easy to estimate the other expenses of a building, and realtors can be a big help in estimating things like insurance, taxes, water, etc. on a property.

Estimating income is a lot more fun. You can estimate rents of a building by doing a quick study of local rents (use Craig’s list or Chicago Reader to determine this).   Buildings in areas that have higher rents generally have greater value.   They are also in locations where it may be easier to find tenants.   However, the prices of buildings in the best locations are disproportionally high, relative to the higher rents they bring in.

My advice to the couple was, find a building where the numbers make sense, in a location that is rentable, and where you will enjoy living. We will keep walking thru buildings, and I will point out anything that shows signs of needing repair or maintenance, such as walls, floors, plumbing. Like the flooded basement in the 2 flat building. Why is it flooded, they asked me.   The short answer is, let’s come back during daylight, and perhaps you will want to invite your contractor friend.   The story continues.

Maggie Finegan, ABR, Move with Maggie Chicago Real Estate Team