How to Comp a Duplex: The Income Approach in Plain English
TLDRSingle family houses get valued by comparable sales. Multifamily gets valued by the income it produces. The math is NOI divided by your target cap rate. The 1% rule is the napkin version of that same calculation. Use either one to size up a duplex in under a minute.
Table of Contents
- Three Ways to Value Real Estate
- Why Multifamily Uses the Income Approach
- The 1% Rule Explained
- The Cap Rate Formula
- Why Your NOI Is Not Your Rent
- How Neighborhood Class Changes the Math
- FAQ
Three Ways to Value Real Estate
There are three ways to figure out what a property is worth. Not two, not one. Three. Each one answers a different question.
| Approach | What It Asks | Best For |
|---|---|---|
| Sales comparison | What did similar houses sell for? | Single family homes |
| Cost approach | Land plus cost to build new | New construction, insurance |
| Income approach | What does it earn per year? | Multifamily, commercial |
Single family flippers spend most of their time in the sales comparison approach. You pull comps, you match square footage and condition and neighborhood, and you figure out what your house should sell for when it is fixed up.
Multifamily is a different animal. The buyer for a duplex or a quadplex is almost never a family moving in. It is an investor. Investors do not care what the house next door looks like. They care what this property cashflows. So the whole valuation method changes.
Single family sells on condition. Multifamily sells on income.
Why Multifamily Uses the Income Approach
A quadplex with four units renting for $1,000 each brings $4,000 a month in gross rent. That is what the investor is really buying. The building is just the machine that produces the rent.
So when you comp a duplex, you are not looking for another duplex that sold down the street. You are asking: what is the rent, what is the noi, and what cap rate is reasonable for this area? Plug those in and you get the value.
This is why two duplexes in the same neighborhood can be priced completely differently. One has tenants paying market rent, the other has long-term tenants paying half of market. Same building, different income, different value.
The 1% Rule Explained
The 1 percent rule is the shortcut version of the income approach. It says a property is worth about one hundred times its monthly rent.
| Monthly Rent | Property Value (1% Rule) |
|---|---|
| $1,200 | $120,000 |
| $2,400 | $240,000 |
| $4,000 | $400,000 |
A duplex where each side rents for $1,200 a month is bringing $2,400 total. At the 1% rule, that is a roughly $240,000 property.
The 1% rule comes from a cap rate of around 7% to 8%, which used to be the normal number for a B-class rental property. In low interest rate periods you might see lower cap rates. In high interest rate periods like now, you want a better cap rate than that.
Pro TipUse the 1% rule for the first ten seconds on any listing. Rent divided by asking price. If the number is under 0.7%, keep moving unless there is a clear value-add. If it is over 1.2%, slow down and ask why.
The Cap Rate Formula
The full formula is cleaner than it sounds.
Cap Rate = NOI / Property Value
Rearrange it and you can solve for the value.
Property Value = NOI / Cap Rate
Take the quadplex bringing $4,000 a month. Convert to annual by multiplying by 12, which is $48,000 a year in gross rent.
Except that is not NOI. That is gross rent. NOI is what is left after expenses.
| Line | Amount |
|---|---|
| Gross annual rent | $48,000 |
| Minus property management, maintenance, vacancy, capex, taxes, insurance | About 40% of rent |
| = NOI | Around $28,800 |
Now apply a 7% cap rate.
$28,800 / 0.07 = $411,000
Right around the 1% rule said. Four thousand a month, roughly $400,000.
The 1% rule and the cap rate math point to the same place on a normal B-class rental.
Why Your NOI Is Not Your Rent
The biggest mistake new investors make is treating rent like profit. It is not.
A rough rule I use is that about 60% of your gross rent ends up as NOI. The other 40% goes to running the property. Here is what that 40% covers:
- property management, which is usually around 10% of collected rent
- Lease-up fees, usually half a month of rent when a unit turns over
- Maintenance, plan for 7% to 8%
- vacancy, plan for about a month a year until the property is seasoned
- capex reserves for the roof, HVAC, water heater, big-ticket items
- property taxes and insurance
None of that includes principal and interest on your mortgage. Mortgage is the next line after NOI and it determines your cash flow, not your NOI.
This is why a duplex renting for $2,400 a month does not cash flow $2,400 a month. After expenses the NOI is closer to $1,440. After the mortgage on top of that, you might be at $200 to $300 a month in real cash flow if the deal was good.
Common MistakeBuying a duplex because the rent minus the mortgage looked good, without subtracting management, maintenance, vacancy, and capex. That is how you end up with a negative cash flow rental that looked like a winner on the back of a napkin.
How Neighborhood Class Changes the Math
Not every neighborhood deserves the same cap rate.
In a rough C-class neighborhood, the property is going to turn over more, maintenance will run higher, and vacancy will be worse. You want a better cap rate to compensate for the risk. When I first moved to Tennessee, I would not buy in certain neighborhoods unless the rent was at least 2% of the purchase price. That is a 14% cap rate neighborhood. A $4,000 a month building better cost $200,000 or less.
In an A-class neighborhood, the math flips. A properties do not hit the 1% rule and they never will. The cap rate is lower, sometimes 5% or under, because the building will appreciate more and attract better tenants. Investors accept less current cash flow in exchange for future upside.
| Neighborhood Class | Target Cap Rate | Rent-to-Price |
|---|---|---|
| A | 4% to 5% | Below 1% |
| B | 7% to 8% | Around 1% |
| C | 10% to 14% | 1.5% to 2% |
| D | Higher than that, or do not buy | Over 2% |
A better cap rate pays you for taking on more risk. A lower cap rate is the price of stability.
FAQ
What if the duplex is vacant?
Use market rent, not current rent. Pull rent comps on comparable duplexes in the same neighborhood, same size, same condition. Then plug market rent into the NOI calculation. A vacant duplex can be a gift if the prior owner was under-renting it and nobody else has figured it out yet.
Does the 1% rule work for quadplexes and small apartments too?
It is a napkin tool. It works on any small multifamily you are underwriting quickly. Once you get to eight units and up, cap rate math is the only way. On larger buildings each unit has different rent and you have to account for commercial expense ratios.
How do I find the cap rate in my market?
Ask a commercial real estate agent who works multifamily in your area. Look at recent multifamily sales on Loopnet or Crexi and back into the cap rate. Or talk to a bank that does small commercial loans. They know because they are underwriting them every week.
Can I use the income approach on a single family rental?
You can, and you should for your own analysis. But when you go to sell a single family rental, the market will value it on comparable sales, not income. That is why a single family with a great tenant and great cash flow does not always sell for more. The owner-occupant buyer only cares what the house next door sold for.
I am just starting out. Should I buy a duplex or a single family?
A duplex lets you house hack, which means you live in one unit and rent the other. That is one of the best starter moves in real estate. But do not buy a duplex just because it is multifamily. Run the 1% rule and the cap rate math on both options and pick the better deal.