| Real estate appraisal for rental properties isn't the | | | | This is the value of the building. If the usual rate is |
| same as for single family homes. If you were | | | | .08, meaning investors in the area expect an 8% |
| looking at a 24-unit building, it would be difficult to | | | | return, the value would be $650,000. |
| find similar ones nearby that have recently sold. | | | | Easy Real Estate Appraisal? |
| Therefore, a market analysis using comparable | | | | Net income before debt-service, divided by the |
| sales isn't normally used. | | | | "cap rate:" It really is a simple formula. The tough |
| It is also not ideal to use replacement costs either. | | | | part getting accurate income figures. Is the seller |
| How do you figure replacement cost if there is no | | | | showing you ALL the normal expenses, and not |
| land for sale nearby with proper zoning? This is | | | | exagerating income? If he stopped repairs for a |
| used as a secondary method, though, and can tell | | | | year, and is showing "projected" rents, the |
| you if maybe you should be building instead of | | | | income figure could be $15,000 too high. This |
| buying. | | | | would mean the building is worth $187,000 less |
| Real Estate Appraisal Using Capitalization | | | | (.08 cap rate) than your appraisal shows. |
| Investors buy rental properties for the income. | | | | Another thing smart investors do when buying, is |
| Therefore it is the income that is used to | | | | to separate out income from vending machines |
| determine value. The rate of return expected by | | | | and laundry machines. If these provide $6,000 of |
| investors in a given area gives you the | | | | the income, that would add $75,000 to the |
| capitalization rate, and this is what you use to | | | | appraised value (.08 cap rate). Do the appraisal |
| accurately appraise an income property. | | | | without this income included, then add back the |
| Start with the gross income. Subtract all | | | | replacement cost of the machines (probably much |
| expenses, but not including loan payments. If a | | | | less than $75,000). |
| building's gross income is $82,000 per year, and | | | | Be careful when using any real estate appraisal |
| the expenses $30,000, you have a net before | | | | method. No formula is perfect, and all are only as |
| debt-service of $52,000. Now apply the | | | | good as the figures you plug into them. Used |
| capitalization rate to this figure. | | | | wisely, though, real estate appraisal using |
| If the common capitalization rate is .10, for | | | | capitalization rates is one of the most accurate |
| example (ask a real estate agent), divide the | | | | methods. |
| income of $52,000 by .10, and you get $520,000. | | | | |