I recently completed a comparative market analysis for a client who will be listing their investment property shortly. The property happens to be in the hot 'student housing' segment, so I thought I'd share some information I learnt on the investment market with y'all.
Unlike residential properties, calculating the approximate value of an investment property is fairly straightforward. If you know the revenue it generates, and a few expenses (maintenance, insurance, annual tax, who pays utilities etc), you can decide what price is right. The ratio of a property's income to it's list (or sale) price is called it's capitalization rate (or cap rate). If you are looking at a property that is listed at $1,000,000, and it generates $120,000 per year in income, the cap rate would be $120,000:$1,000,000, which is 12%. Pretty good!
In 2006, the average cap rate for investment properties that have sold around campus, under $500,000, is 10.9%. That means if your investment property generates $24,000 per year in income, you can expect it to sell for $220,183.
Right now, average cap rate for investment properties that are actively listed around campus, under $500,000, is 10.0%. That means if your investment property generates $24,000, the average list price (the price you offer your home on the market at) would be $240,000.
If the price you list your property at gives you a lower cap rate (6-8%), you might have a tough time liquidating the asset. When investors can find 10% and 11% cap rates, why buy a multiplex that underperforms the market?
Often, people will have a number stuck in there head, that they 'need to get' for the property. Unfortunately, unless you come across a very sympathetic buyer, this number doesn't mean much in the marketplace. Your property is worth what a buyer is willing to pay for it in a reasonable amount of time. If you price your property where you think it should sell, instead of where similar properties have sold, you may be stuck with a property that won't sell.
As I tell my clients, it's much better to price your home right and turn down low offers (or let my team work to negotiate them up) than to price the property too high and not see any action.