Today, you shouldn’t overlook the importance of property valuations. In case you don’t know, property valuation is essential to assess the accurate value of apartment buildings during their sales. As an investor, you have a lot of tasks to do when purchasing a new property. First, you need to have enough budget to carry out the necessary analysis on the building. For instance, you need to understand the current condition of the property. Besides, you also need to get the right information regarding the construction quality, layout, repairs, composition, fixtures, and design of the building.
The easiest way to analyze and purchase an investment property at the right value is to contact professionals. Read on to discover how the right property investment firm, such as Apartments Value, could help you get an accurate value for your property.
How to calculate apartment buildings value using Cap Rate
Today, there are a couple of ways you can go about evaluating the worth of your property. First, you can calculate the value using the Gross Rent Multiple(or GRM) approach. This method requires you to understand the current gross rate multiplier of the building you’re looking to sell or buy.
The second method, which this post will focus on, involves the use of the current Capitalization (Cap) Rate. It’s pretty simple; this method involves making a comparison between the actual profitability of a property and its value. Of course, for you to do that, you need to understand the NOI (or net operating income) of the apartment building.
Finding the NOI value
For you to get the exact figure for the building’s NOI, you need to get the value of the total annual rent. You also need to value the cost of running the building without mortgage payments but with the inclusion of property tax.
Here’s a brief illustration of how property valuation works using cap rate:
- The property has 10 units;
- The monthly rent for each unit is $1,000;
- Vacancy reserve is 3%;
- The cost of running the apartment, including utilities, maintenance, management, and cleaning, is $20,000
Using the figures above, let’s find the annual gross rent for the property. You can calculate the investment property value as $1,000 × 10 (units) × 12 (months) = $120,000.
To get the NOI value, you need to subtract the vacancy reserve value and the cost of running the apartment from the annual gross rent.
- Annual gross rent = $120,000
- Vacancy reserve is 120,000 × 3% = $3,600
- Cost of running the property = $20,000
NOI value is equal to ($120,000 – $3,600 – $20,000) = $96,400.
Finding the apartment building value
Now, it’s time to determine the value of the apartment building. To do that, you need to understand what the Cap rate for the building is. It takes the help of an expert to determine this figure. This explains why you need to speak to a reliable apartment buildings valuation expert like Apartments Value, to handle the valuation for you.
That said, the Cap Rate is the ratio between the price at which a similar property was sold and the NOI value. You can generate the cap rate by dividing the NOI of a comparable property by the price of the building.
Let’s assume a comparable property sold at $1,000,000 and generated a net operating income of $65,000. The cap rate is 65,000 ÷ 1,000,000 = 0.065 or 6.5%.
According to research, the cap rate for suburban Chicago apartment buildings is roughly between 4.5% – 5.0%. An average metropolitan Chicago property has a cap rate of about 3.9℅.
If the apartment you’re selling or purchasing is in the metropolitan area, then the value of the property should be 65,000 ÷ 0.039 = $1,666,667.
Also Read: What You Need To Know About FCA Registration.