Ever since I got into real estate, I could never get my finger on how to measure the intrinsic value of a property. Instead, I always used a very basic rule of thumb that I thought I'd share in leymans terms (ignoring the fancy terminology like entry capitalization rate).When buying a condo, house, or multi-fam property, how can you justify a price that far exceeds the potential amount that you can rent it for? I'm not saying that you should only buy something that is cash flow positive. Of course not all owner occupied condos, houses or multi-fams can be cash flow positive (or even break-even). In fact in Boston, most aren't. However, you should have an idea of what the property would rent for in the case that your situation changes and you have to move. If you buy a two million dollar condo in the South End, you ough to be sure that you'd be able to rent it for at least $8k or you'll find yourself picking up a $5k+ tab for your mortgage if you have to rent it out. It's simple to do this, look around and find out what comparable properties are renting for, figure out your monthly payments (including taxes, insurance etc), and see what the difference is. If your number is off by more than 25% of the rent that you used, you may want to reconsider.
Just a thought!
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