Using the income approach is only 1 of 3 methods to value real estate. The other 2 are:
1. replacement approach (where you calculate how much it would cost to build the same building in the same spot, typically by multiplying the sq ft X price/sq ft).
2. comparable sales. you can look at comparable properties and see how much those sold for.
If your due dilligence shows a loss, I would investigate if this can be changed in your favor. Example, 3 years ago I bought a 2-unit that had $500 rent/mo from each unit. After rennovation of the 3rd vacant unit and updating the rents (within 2 years) it became a 3-unit with each unit bringing in $735/mo. Look for: increase income (add units, update units, add storage, add coin-op washer/dryer, etc.), reduce expenses (reduce taxes, improve ownership structure, factor in proper depreciation, get a better manager, improve quality of tenants, reduce vacancies, etc.).
If the numbers are still bad, walk away or make an offer that will make sense for you.
Jan 28, 2009