Consider income in sales price when selling a rental?

[Carpediem]

We are thinking about selling one of our vacation rentals. We've owned it for 3 years and it generates anywhere from $20k-$23k annually in rental income. I used one of the real estate websites to see what the unit is currently valued at but was wondering if the price should get bumped up some based on the fact that someone would be buying a revenue generating property. I realize the selling price has to be supported by the appraised value but assuming the buyer is buying it to rent it out, isn't 'the business' worth something too?

 

[JDARNELL]

What is the business? What additional value are you bring to the table above the value based on market comps?

 

[RunningBum]

If there's an identical unit next door that doesn't happen to be a rental right now, why would yours have more value? Couldn't that one just as easily be made into a rental?


If it's at least somewhat unique, you may be able to market how much revenue it gets from repeat visitors.

 

[Carpediem]

What is the business? What additional value are you bring to the table above the value based on market comps?

I guess I was looking at it as a vacation property rental business. Of course, the only tangible asset is the condo unit.

 

[Carpediem]

If there's an identical unit next door that doesn't happen to be a rental right now, why would yours have more value? Couldn't that one just as easily be made into a rental?

Good point. I guess the only thing that would make mine unique is 3 year's proven history of rentals. I suppose that fact would be used more for marketing purposes vs. determining value.

 

[brucethebroker]

Personally, I would use your rental history, then look around for a similar unit, perhaps distressed a little (paint, carpeting, etc.) that I could buy for 10-20% less than yours. Your numbers would let me sleep better. (Like Running Bum said, yours most likely does not have any unique features.) But then again, I think like a real estate broker/investor.

However, you might be a perfect candidate for a FSBO sale. A less savvy buyer may not think that way, and the rental history (push the possibility of repeat renters) might be just the thing to push him/her into a sale.

 

[Senator]

It is worth the same as the place next door, assuming both are in similar shape. There is no business you are selling, the investor would have their own business.

What are the expenses?

I can tell you that I would suspect that expenses would be ~$12K, and it returns ~$12K after expenses. After a mortgage payment, a lot less. Figure a 15% cash-on-cash return to an investor, after all expenses. Using your logic, your value is likely less than the place next door. An investor would put down 20%, and want 15% on that money put down, after all expenses, including the mortgage payment.

Sell at $160K. $32K down. 15% of $32K is $4,800. A mortgage payment on 128K @ 4% is $4,666 a year, which leaves about a 15% return. Is $160K a good number to sell at?

You can also determine cap-rate, and assume an investor would want an 8%-10%+ return. With $12K in net income, that is a $150K sales price.

Does $150K sound like a price you want to sell at?

 

[pb4uski]

In most appraisals of rental properties, the appraisal includes a market approach and an income approach and triangulates between the two.... in theory, they should be similar (but rarely are).

For example, because we have a good, long term tenant who pays us a good rent for reasons of their own, my Mom's commerical property would likely be worth a lot more under the income approach than the market approach.

 

[Senator]

In most appraisals of rental properties, the appraisal includes a market approach and an income approach and triangulates between the two.... in theory, they should be similar (but rarely are).

For example, because we have a good, long term tenant who pays us a good rent for resons of their own, my Mom's commerical property would likely be worth a lot more under the income approach than the market approach.

You are right. Commercial property uses the income approach more often, and that is why people invest in it. For the money/returns. Raise rents and increase lease length, it is worth more.

Banks who make the commercial loans, use the income approach to make sure you have enough money to pay them back. The bank will only lend up to an amount where your payment is covered by the net rent after expenses. They will typically make sure you have 20% more in profit than the payment is. Rents after expenses should be 1.2x the payment.

With residential property, investors have to compete with homeowners who are not interested in the financials, they just want to live there and are willing to pay for the privilege.

 

[Bigdawg]

We are thinking about selling one of our vacation rentals. We've owned it for 3 years and it generates anywhere from $20k-$23k annually in rental income. I used one of the real estate websites to see what the unit is currently valued at but was wondering if the price should get bumped up some based on the fact that someone would be buying a revenue generating property. I realize the selling price has to be supported by the appraised value but assuming the buyer is buying it to rent it out, isn't 'the business' worth something too?

My old pick up truck has a Kelly Blue Book value of $4000. But, since I plow snow with it and haul stuff earning about 10K/year the truck is really worth $8000

 

[aja8888]

My old pick up truck has a Kelly Blue Book value of $4000. But, since I plow snow with it and haul stuff earning about 10K/year the truck is really worth $8000

Only when it snows!

 

[Sunset]

My old pick up truck has a Kelly Blue Book value of $4000. But, since I plow snow with it and haul stuff earning about 10K/year the truck is really worth $8000

If you move to Alaska, your truck will be worth $12,000 as the snow time there lasts longer

 

[kcowan]

My buddy thought his place should be worth more because he made $150k/yr as a B&B. I said he should be careful that the B&B business might affect his capital gains exemption on sale.

Finally he checked with his accountant and shut down the B&B for two years before relisting it for sale.

 

[RenoJay]

Perhaps if you advertised on a business-buying site like bizbuysell.com rather than an MLS, someone may buy it based on cap rate and pay above market. But ultimately you’d be screwing a naive buyer.

 

[OldShooter]

We are thinking about selling one of our vacation rentals. We've owned it for 3 years and it generates anywhere from $20k-$23k annually in rental income. I used one of the real estate websites to see what the unit is currently valued at but was wondering if the price should get bumped up some based on the fact that someone would be buying a revenue generating property. I realize the selling price has to be supported by the appraised value but assuming the buyer is buying it to rent it out, isn't 'the business' worth something too?

Web sites provide free guesses. Seller appraisers provide paid-for guesses. As sellers, we have dreams.

Ultimately only the market and buyers' banks' appraisals will determine what your property is worth.

 

[Senator]

Perhaps if you advertised on a business-buying site like bizbuysell.com rather than an MLS, someone may buy it based on cap rate and pay above market. But ultimately you’d be screwing a naive buyer.

There is no such thing as a naive business buyer. It is the buyers responsibility to do the due diligence.

I am guessing by using a investment cap rate of ~8% and a value of $150-$160K, it is half of what the OP wanted to sell for.

OP, what do you think you would sell for? Is $150K even in the ball park?

 

[joeea]

I realize the selling price has to be supported by the appraised value but assuming the buyer is buying it to rent it out, isn't 'the business' worth something too?

You aren't selling a business. You are selling a housing unit.

You aren't selling any receivables. You aren't selling a committed customer list. You aren't including employees. There is only one asset.

While your locale might have a high percentage of units that are rented, that will be baked into the price for all units. A home/condo is only worth what the market will bear. Every other equivalent unit for sale in your area carries the same potential for rental income that yours does.

 

[Luck_Club]

The repeat customers might have some value, but not much.

 

[pb4uski]

There is no such thing as a naive business buyer. ...

Oh yes there is.... we see it all the time in M&A... buyers "fall in love" with the deal and overpay, end up with huge goodwill and ultimately end up having to write it off as impaired because the profits from the acquired business were not near as good as expected.... see it too often by sophisticated buyers.