What about the comps?

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Had a client ask us to take a look at the comps on a small apartment building before making an offer.

I think this brings up an interesting difference between our business (taking a rigorously quantitative approach to evaluating income producing real estate) and that of brokers who do single family homes.

In the single family home market, comps are king. There’s really no other way to determine whether you are doing a good deal or not than to look at sale of similar buildings. So, you look at price per sq foot, or price per bedroom, or something, and you say “am I paying more, less, or about the same as everyone else?”.

In our business, cashflow is king, not comps.

The relationship between the cashflow and the price you pay for it (roughly, the CAP rate), more-or-less determines what your return will be on your investment, assuming an infinite hold period (I recommend 27.5 years, because that’s when your depreciation runs out).

Before moving forward with the deal, you want to compare your estimated return with all of the other things you can potentially do with the money (not just the other buildings you can buy!).

If you like the return, you should buy the property. And, conversely, if you don’t like the return, it shouldn’t matter that the price is “fair” compared to what other people are paying.

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