Real Property Market Value Appraisals
Single residential units are valued based on sales records of comparable real estate units. This basis however is not as effective in the case of rental properties. Imagine if you are looking at a 24-unit building. You will be extremely lucky to find a property of a comparable structure sold in the immediate past in a similar location.
It's also not ideal to use replacement costs for income property appraisal. You will have a problem if there is no real estate property in the vicinity with no proper zoning that is on sale. On the other hand, this method will be useful if you are making a decision on whether to buy or build. Real Estate Valuation By Cap RateIncome properties are bought for the income. The value of the property then is based on its projected income. The rate of return investors in a given area expect gives you the capitalization rate, or "cap rate" for the area. This is the method used in calculating the appraised value of the rental property. See the following example for a clearer picture. The process begins with the gross income of a property. Compute also the total expenses for the year and subtract, not including loan payments. So if the property grosses $82,000 for the year and the total expenses is $30,000, the net income would be $52,000, again excluding debt service. You then apply the capitalization rate to this figure.Suppose the acceptable cap rate in the area is .10, for example (ask a real estate agent), meaning investors expect a return of 10% on the value of the property. If you divide your net income by .10, the result will be $520,000 which will be the appraised value of the property. Supposing further that the property investors in the area presuppose an 8% ROI. Then the value would be $650,000.A Straightforward Property Valuation?Take net income before debt-service, and divide by the "cap rate:" It's a simple formula. However, the tough part is getting accurate income figures. Are all the standard expenses included? Did he and exaggerate the income? Suppose he stopped repairs for a year, and also showed you the "projected" rents. In that case, the income figure could be $15,000 too high. Going on with your computation and using a .08 cap rate, the actual value of the building would be $187,000 less than the stated value.To be on the conservative side, property buyers exclude vending and laundry machines from the rental income. Again, assuming that income from these sources is $6,000 and a .08 cap rate, the appraised value would be $75,000 higher. Instead, do the appraisal without this income included, then add back the replacement cost of the machines (probably much less than $75,000) to arrive at a valuation.The lesson is to be prudent when using a real estate valuation formula. Considering that there is no perfect procedure for every situation, be sure to get the right figures in order to get the right answers. If used wisely, though, appraisal by capitalization rates is one of the most accurate methods of real estate valuation.Well planned home repairs can substantially raise your selling price. At allseasonsconstruction.net, we can help get your home ready to sell with construction services such as awnings.