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:
- Cap Rate. Comparing the “capitalization rate” of the subject property to those of other properties recently sold, in the immediate area.
- 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.
- 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.
- 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.
- 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.
- 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