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Property Valuation

Property Valuation. Dr. Arthur C. Nelson, FAICP February 2010. Overview. Market Comparison Approach Cost Approach Income Approach Rules of Thumb Ratio Analysis. Market Comparison Approach. You want to buy a 10 unit apartment. How much should you pay?. Cost Approach.

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Property Valuation

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  1. Property Valuation Dr. Arthur C. Nelson, FAICP February 2010

  2. Overview • Market Comparison Approach • Cost Approach • Income Approach • Rules of Thumb • Ratio Analysis

  3. Market Comparison Approach You want to buy a 10 unit apartment. How much should you pay?

  4. Cost Approach • Cost to replace or reproduce • Variety of methods to estimate • - Depreciation • Physical deterioration • Functional obsolescence • Economic obsolescence • + Land value

  5. Income Approach V = I/R V = Value I = Net Operating Income, NOI R = Capitalization Rate

  6. Steps Potential Gross Income (PGI) • Vacancy, Bad Debt Allowance (VBD) + Miscellaneous Income (MI) Effective Gross Income (EGI) • Operating Expenses (OE) Net Operating Income (NOI) ÷ Capitalization Rate (R, or Cap Rate) = Market Value

  7. Example Application PGI $ 80,640 VBD - 4,032 MI + 1,000 EGI $ 77,608 OE - 29,100 NOI $ 48,508 R @ 0.0971 (or 9.71) = $499,500 R @ 0.1075 (or 10.75) = $451,200

  8. Rules of Thumb Overall Capitalization Rate R = NOI/V Net Income Multiplier NIM = V/NOI Gross Income Multiplier GIM = V/PGI or V/EGI Equity Dividend Rate, “Cash on Cash” EDR = BTCF / Equity

  9. Before Tax Cash Flow

  10. Cash on Cash Purchase Price $500,000 Equity @ 30% $150,000 BTCF $ 4,273 EDR, Cash on Cash 2.85%

  11. Ratio Analysis Loan to Value Ratio Mortgage Amt / Value, or Mort. Outstanding / Value Debt Coverage Ratio DCR = NOI/DS Default Ratio DR = (OE + DS) / EGI Operating Expense Ratio OER = OE / EGI

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