Found myself today in a conversation about how to set the sale price on a property, and I’m not sure I buy into or maybe just don’t understand the equation everyone likes to throw around.
That equation being ( lots x Rent) x12 x .6 = What it’s worth
My question is if .6 is being used as the multiplier then is the assumption that the other 40% is covering all of the expenses.
I’m not sure I believe that.
My actual numbers are close enough to this example that i’ll try and use as close to real life values as possible, but here’s what I have.
50 Lots on 10 acres
Space rent is $200
Utilities are 20K
Taxes are $2,100
Insurance is $2,100
Using the formula 50 * 200 = 10,000 *12 = $120,000 * .6 = $72,000 so the value or sale price would be around. 720,000 at a 10cap
However my real life expenses are as follows
20,000 (for water, trash electric & sewer)
2,100 for property tax
2,100 for insurance
for a total of $24,200 in expenses per year
So I proposed that a valuation along these lines was closer
50*200 = 10,000 * 12= 120,000 * .75 = 90,000
And that’s where we started to argue and get lound. My buddy contests that the .6 is the standard regardless of location or situation, and yet I said why am I being put in the same group of higher expenses when my costs aren’t the same.
For the sake of answering this, I can tell you that the expenses I mentioned are actually on the high side of my actual numbers, but since I’ve been working on the books for Uncle Sam, I can say that everything is within a few hundred dollars of what my real life numbers are.
Bottom line is what am I getting for that missing 40%