Two 5-units, same price: one full at market, one where every tenant is 200 under
I've read the section on income valuation twice and I think I finally understand why these two buildings are asking the same number. Both are 5 units, same small city, about a mile apart. Building A turned over three units in the last year and the rents match what similar units advertise for. Building B has tenants who have been there six, eight, eleven years, and every one of them is roughly 200 a month under the comps.
Building A collects more today, so at the same price it shows a better cap rate right now. What I'm buying is a building that already works, and if I'm honest about my experience level that has some value.
Building B collects about 1,000 a month less. Since five units means the value follows the income rather than what the house down the street sold for, that 1,000 is the whole reason to buy it. Close the gap and the building is worth more. Fail to close it and I paid Building A money for Building B income.
What I can't figure out is whether that gap is a real opportunity or whether those tenants are under market because the units are rough, or because nobody in that neighborhood actually pays the comp rent (which is a thing I've started to suspect about half the comps I pull). Where do you land?
Same price, same size. Which do you buy?
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