Investment Property Appraisal

How to determine the value of an income producing residential property?

There are a number of methods that can be used to determine value. Some of them are as follows:

1. Cap Rate. Comparing the “capitalization rate” of the subject property to those of other properties recently sold, in the immediate area.
2. Gross Income Multiplier. Comparing the gross income generated by the subject property to that of other properties recently sold, in the immediate area, times a “multiplier”. For example if a building grosses $60,000 and similar buildings have been selling for 10 times the gross, then the value could be assumed to be $600,000.
3. Net Income Multiplier. Comparing the net income generated by the subject property to that of other properties recently sold, in the immediate area, times a “multiplier”. For example if a building nets $50,000 and similar buildings have been selling for 12 times the net, then the value could be assumed to be $600,000.
4. Average Price per Apartment. If similar buildings to the subject property have been selling for $80,000 per apartment and there are 10 apartments in the building, then the value could be assumed to be $800,000.
5. R.O.I. How much of a “return on investment” would a prudent Buyer want for his down payment on a property? Should it equal or exceed what he could get in the stock market, in bonds, or some other investment. The R.O.I. could then determine how much a Buyer is willing to pay for the subject property.
6. Cost of Replacement Value. Separating the land value from the value of the building, how much would it cost to construct a new building on the site of the subject property? Construction replacement value could be established at $85 per square foot or perhaps $125 per square foot.

Which of these valuation methods is the most accurate? Can more than one method be used on the same property to determine value? Is there a value difference in a “conventional” building (i.e. Building constructed as a six-plex, purpose built) versus an “unconventional” building? (I.e. Large non six-plex building which was later modified to contain six apartments.) What could both a conventional and non-conventional building have a similar profit and loss statement? How is value affected if the subject property has a superior net income to similar buildings, but one of its apartments is illegal non-conforming? Does having a Fire Marshall Retro-fit Letter affect value?

If you want to buy or sell residential investment property in Ottawa, there is no substitute for the knowledge and experience of Martin Elder