In another post, I discussed cap rates of duplexes and properties for which income and expense information is readily available. With a multifamily property, you can demand rental history information or a schedule E from the seller.
This is not something you can do with single family homes where the owner occupied the home and did not rent it. Yet some single family homes make excellent rentals. One advantage to single family homes is that the tenants typically pay all utilities, including water, sewer, garbage, lawn care and snow removal. Therefore, you can use a higher multiple than 100x one month’s rent and still have positive cash flow. I use 120x.
Also, you have two different potential markets when it is time to sell–investors and owner occupants. Owner occupants are a much larger pool of potential buyers and have financing options and occasional tax incentives that simply are not available to investors.
The way I like to evaluate single family homes is to, first of all, look at comps using the MLS and Zillow. Be sure that you are taking age and condition into consideration. After a while, you get a sense of values per square foot in the area you are watching.
You can also look at county records to see previous transfer prices for neighboring properties. You can use Netronline.com to find the assessor for your county. This is particularly useful for condos.
I also like to pull up a Trulia map of places for sale then on an adjacent screen I pull up a Trulia map of places for rent. It gives me a good idea of rental values of 2 bedrooms, 3 bedrooms, etc. for the same area. Or you can use rentometer.com if you have a specific address in mind. I use the two maps to look for houses that might have a better than average rent versus price ratio and that meets my rule of thumb.
Then I apply my rule of thumb. My rule of thumb says that I can pay up to 120x the monthly rental value of a property for the contract price and will have a good chance that the income will cover all expenses, including mortgage.
You may not be interested in renting this single family home, but if times get tough, or if you cannot sell, you can rent out your property if the rent covers expenses. You can rent out homes that meet the rule of thumb for a rent that covers most, if not all, expenses, but it rarely works out for high end places such as big homes on acreage or luxury condos. There is a limit to the amount of rent tenants can afford but owners are often willing to pay far above that range.
Another way to perform your analysis is to determine the rental value, using rent-o-meter or by studying for-rent ads or by asking a property manager. Multiply by 12 to determine annual rent. Subtract vacancy rate to get adjusted gross rent. Then subtract taxes, landlord insurance (not just owner insurance, you need liability as well as fire), estimated annual expenses and repairs, e.g. 35% of gross rent, and divide the result by the purchase price to determine cap rate. Whatever estimates you use for expenses and repairs, use the same percentage for other properties you are considering that are the same age and condition. This will give you a good way to determine approximate value. You do not need to subtract garbage, sewer, or water if they are usually included in leases for houses in your area.
If you are considering fixers, get a contractor in to make an estimate of repair costs. As you gain experience, you will be able to make rough estimates on your own for common things such as carpeting, roofing, painting, etc. But there is no harm in getting real estimates. You’ll be ready to get started on repairs as soon as you close if you already know which contractors you will use. For older properties, such as turn of the century properties, I add about 60k for hidden problems even if wiring looks updated and there are no obvious plumbing problems. Always check out wiring and plumbing and foundation of these older places. 60k may be low depending on what upgrades have been done to the hidden stuff over the years.