I need your opinion!

[mark pale]

I need your help in pricing one of my vacation Rental Homes in Destin. It has a 3 month old appraisal for 2.0M but I want to make sure I put it on the market for the right price and not the appraised price.

The main house is 6 bedrooms, 6.5 baths, 3300 sq ft and the Apartment above the garage is 2 bedrooms and 1 bath and 900 sq feet. It has the following:

- Gulf Views from the front porch
- 100 yards to the beach and has deeded beach access for our gated gulf front community that is made up of 12 homes
- heated pool.
- Sleeps 30 and rents in the summer months for 5900 per week and stays booked solid. The annual rental income has been a consistent $90,000.

It was built in 2001 and and was built for rental income. What is this house worth in this market?

 

[Smiling JOe]

I bet a good Realtor could help you. ;-)

 

[mark pale]

What is the correlation of rental Income to valuation in Destin right now? I know theres been no correlation in the past and thats why prices went thru the roof, but shouldnt there be some calculation based on income as to what the property is worth?

 

[Kurt]

What is the correlation of rental Income to valuation in Destin right now? I know theres been no correlation in the past and thats why prices went thru the roof, but shouldnt there be some calculation based on income as to what the property is worth?

I don't know of any rule of thumb, but there are realtors / rental agents that could give you that info through a detailed analysis.

What subdivision is it in?

 

[DBOldford]

I keep hearing people say there is no correlation between rental revenues and value. This is clearly not a home that would reasonably be used as a primary residence. My understanding is that the vast majority of $2M+ properties in our area are cash sales resulting from 1031 exchanges. Consequently, your $90K rental income would be significant to an investor, even after expenses. The rental income is only negligible if a potential buyer is looking for a primary residence or a second home/no rental. Good luck.

 

[Robert]

Income Approach

Find similar properties that have sold recently in the area.
Find out or figure out what the annual income is for each.
Subtract expenses (do not include mortgage payments as an expense) from that Effective Gross Income or EGI for each comparable.

Typical Expenses:
Accounting and Legal - Usually 1% of EGI
Management - Ranges from 3-7% of EGI
Reserves for Major Replacement - To replace a roof or A/C usually 3% of EGI
Repairs and Maintenance - To repair windows, doors, walls, etc usually 3%
Hazard Insurance - Cost of your home owner's policy
RE Taxes - Your annual taxes
Advertising - Cost of advertising usually ranges 1-3%
Janitorial - Ranges from 1-5%
Pest Control - Usually 1%
Utilities - Add them up. Annual for power, water, phone, cable etc.
Misc. - Usually 1%

Your result is the Net Operating Income or NOI for each property.
Divide the NOI of each property by its sale price to get a percent.
This is called a Cap Rate.

Now take your EGI and subtract out expenses.

Divide your NOI by the trend of the Cap Rates.

The result is the estimated value of your property.

Not sure if you quoted EGI or NOI of $90,000.

Examples: (this is not to be construed as an appraisal only an example of the math, I don't know the real numbers)
As NOI: $90,000 / Cap Rate of .08 = $1,125,000
As EGI: $90,000 - 32% expenses = $61,200 NOI
$61,200 / .08 = $765,000

Note: In our area a residential investor's rule of thumb is "100 to 120 x monthly rent". But that is for a rental year of 12 months. I guess you could do "gross annual rent /12 * 100 to 120".

Even if you quoted NOI for the property, I don't see $2,000,000 for an investor. However, for primary/vacation home I can see it. The latter has intrinsic value built in (pride of ownership etc.).

You probably had a residential appraisal done and the appraiser used three single family homes in the area. That may be the best way to market the property.

 

[Diane4145]

:clap_1: :clap_1: :clap_1: I love this board, people are sooo helpful and sincere!

Income Approach

Find similar properties that have sold recently in the area.
Find out or figure out what the annual income is for each.
Subtract expenses (do not include mortgage payments as an expense) from that Effective Gross Income or EGI for each comparable.

Typical Expenses:
Accounting and Legal - Usually 1% of EGI
Management - Ranges from 3-7% of EGI
Reserves for Major Replacement - To replace a roof or A/C usually 3% of EGI
Repairs and Maintenance - To repair windows, doors, walls, etc usually 3%
Hazard Insurance - Cost of your home owner's policy
RE Taxes - Your annual taxes
Advertising - Cost of advertising usually ranges 1-3%
Janitorial - Ranges from 1-5%
Pest Control - Usually 1%
Utilities - Add them up. Annual for power, water, phone, cable etc.
Misc. - Usually 1%

Your result is the Net Operating Income or NOI for each property.
Divide the NOI of each property by its sale price to get a percent.
This is called a Cap Rate.

Now take your EGI and subtract out expenses.

Divide your NOI by the trend of the Cap Rates.

The result is the estimated value of your property.

Not sure if you quoted EGI or NOI of $90,000.

Examples: (this is not to be construed as an appraisal only an example of the math, I don't know the real numbers)
As NOI: $90,000 / Cap Rate of .08 = $1,125,000
As EGI: $90,000 - 32% expenses = $61,200 NOI
$61,200 / .08 = $765,000

Note: In our area a residential investor's rule of thumb is "100 to 120 x monthly rent". But that is for a rental year of 12 months. I guess you could do "gross annual rent /12 * 100 to 120".

Even if you quoted NOI for the property, I don't see $2,000,000 for an investor. However, for primary/vacation home I can see it. The latter has intrinsic value built in (pride of ownership etc.).

You probably had a residential appraisal done and the appraiser used three single family homes in the area. That may be the best way to market the property.

 

[mark pale]

Thanks for the input. My thought was around 1.3M but it just a guess its hard to know if thats reasonable.

 

[luv30A]

Mark,

Considering the rise in mortgage interest rates recently, I have done the analyisis based on a similiar home that I own that grosses $110k/year with actual expenses experienced. Assuming no rental agency, 100% finance at 6.85%, and a limited tax effect of rental losses of $25,000 per year; a break even cashflow situation for your potential buyer would equate to a purchase price around $1.25 million. At that price the new owner would have no yearly out of pocket after taxes and would have the upside of future appreciation.

Big home = great rentals

 

[Kurt]

Robert - way over my head but it looks like a ginormous post. Thanks!