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