Cost Per Rentable Room – Rental Property Valuation
My Ah-Ha Moment
It didn’t take me long to realize the ineffectiveness of the conventional Cost per Door calculation in multi-family real estate evaluation and comparison. Think about it for a moment, one unit can be a bachelor suite while the next one has 4 bedrooms and a dining room. Then, extend these inaccuracies to an entire multiple suite apartment building and you begin to realize the problem.
The cost per square foot calculation gives you absolutely no idea of the number of rooms involved, so to be effective, the comparison must be of buildings of approximately the same size.
Determined to find a more accurate metric, my research led me directly to a metric called “The Cost per Rentable Room” developed in New York City during the early 1900’s. At this time, New York was the North American centre of rental apartment buildings. When finalized, we start with the assumption that a standard bachelor apartment has 2.5 rentable rooms, and, for every room above a standard bachelor suite, you simply add another room, except for a two-piece bathroom for which a half a room is added. Therefore, a one-bedroom apartment is 3.5 rooms and a two bedroom and a den is 5.5 rooms. Sometimes, the use of discretion is required, but that is not called for very often. When the room numbers are calculated, the sum of the rooms is divided into the asking or valuation price and you have the cost per rentable room, which I have used in every valuation and comparison since then.
This metric has severed me very well over the years.