You need to find out the rent roll and then subtract the operating expenses to find out the Net Operating Income (NOI). After that you need to calculate the Capitalization Rate (Cap Rate) which is the net operating income divided by the price you pay. As an example, if the NOI is $50,000.00 per year and the price you pay is $500,000.00, the Cap Rate will be 10%. This means you will get back via income one tenth of the price you paid every year. After ten years you will get back all your money and then as you move forward beyond that, the rest is gravy.
Here is a more detailed break down of the Cap Rate and how it works on Wikipedia.org:
Keep in mind that if you do not purchase all cash and will be securing a mortgage, the cost of financing can have a dramatic effect on the Cap Rate. If that is the case, you simply have to ask yourself how much of a positive cash flow you need to make the deal worth while for you.
Whether it is a three or four family doesn't make much of a difference, here are some things you should consider:
1) Do extensive research in the area to make sure you know average rental rates in the area.
2) If there are existing tenants that you are considering keeping, make sure they have a lease and that you receive proof that they have been paying their rent and on time.
3) You want to see proof of expense amounts such as insurance, real estate taxes, water bills, etc.
By the way, I have some good income producing properties actively listed with me for sale that may be good for you. If you want to talk about them or if I can be of further assistance, please let me know. Good luck!
Mitchell S. Feldman
Associate Broker/ Director of Sales
Madison Estates & Properties, Inc.
Office: (718) 645-1665/ Cell: (917) 805-0783
Email: MitchellSFeldman@aol.com... more