When figuring net income for a purchase, do you include the potential income if vacant units were occupied

If you were to include it then it would seem you should pay more. I'd like to think I could propose a purchase price that only included actual income at the time of purchase. Once I own it and fill it with more tenants this should increase the value for me then when I am a seller or to refi. What are your thoughts and approach? How do you handle this?
In Buying Property - Asked by Larry K. - Nov 19, 2009
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Answer(s)

Frederick G.
Owner/Investor
Edmonton, AB

Larry
Cash flow is KING. you never purchase a building without cash flow. So if the building will not give positive cash flow the price must be lowered to make that happen or you move on. You never invest on hopes and dreams only actuals. Total income minus total expense including debt service equals cash flow positvie or negative. That again is current actual numbers.
take care fred

Nov 19, 2009
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Paul M.
Broker/Agent
Madison, WI

Larry
The asking price of a property is normally based on the NOI, the net operating income (this should be actual but sometimes is stated in potential), and then is divided by a CAP rate to get value. Today's CAP rates are all over, but most investors are looking for at least a 9% CAP rate. I would take the current NOI (actual) of the property and divide it by at least a 9% CAP rate to come up with a value. However, there is something to be said about the potential income that could be made on a vacant space if the building is in a good market and is a quality property. But like Frederick said Cash is King and you should find something that is cash flowing now or will be within a year after your purchase. Good luck!
Paul

Nov 20, 2009
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Ed B.
Broker/Agent
Denver, CO

Larry, while both cash flow and NOI are important considerations when purchasing an investment property they are only part of the story in determining a price. If vacancy exists there will certainly be costs associated with repair, marketing, brokers fees and possibly tenant improvements. Additionally, there is lost base rent and other costs usually paid by a tenant which should be estimated for the length of time you feel the units will be unoccupied. Whether you use Fred or Paul's method to come up with a purchase price, you should subtract these costs from the price. Ed

Nov 20, 2009
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Nasi L.
Broker/Agent
Boca Raton, FL

YES.... FIRST;
SECOND; FIND OUT AVERAGE VACONCY FOR THE AREA..? LEST'S SAY 10% YOU DEDUCT THIS FROM GROS INCOME THEN DEDUCT (ACTUAL) ALL FIXED EXPANCES FROM THE INCOME DEDUCT ACTUAL DEBT COST... WHATS LEFT IS YOUR RETURNE ON CASH DOWN PAYMENT..
LET ME HELP YOU..? CALL ME AT 954 5373571

Nov 21, 2009
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Frank B.
Developer
Toms River, NJ

Absolutely Not- It is best to only pay according to what the property is currently earning. You may not be able to rent the empty units for a while. Never set a price based on proforma numbers, only on acutual numbers and actual occupancy.

Nov 21, 2009
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Karim A.
Broker/Agent
San Diego, CA

The income approach to property valuations suggest that the purchase price should be a function of the actual income of the property. After all, you should not be paying for work that you will be doing to cure vacancies. Of course, the caveat with the income approach to property valuations is that based on this approach an empty building (i.e. 100% vacancy) will be worth nothing, which of course is not the case. In this case, the replacement value will typically be a better method of determining the price to pay for such a property.

Nov 24, 2009
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Gregory G.
Broker/Agent
San Francisco, CA

Often times you will buy on potential income... but the CAP rate will be much higher to account for this because it is a pro-forma.
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Gregory Garver - Commercial Real Estate Broker
Broker License# 01716531
(415)225-9894
gregory.garver@gmail.com
Web Reference: http://www.gregorygarver.com

Dec 3, 2009
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