Property Valuation

While residential real estate and vacant land are typically valued by analyzing recent sales of comparable properties, commercial and investment properties are generally attributed value based on their income and expenses. The type of income and expenses, their historical performance, and future projections generally drive the prices paid by investors for income property.

There are many different ways of valuing investment properties, the most common of which are the Gross Rent Multiplier (GRM), Capitalization of Net Income (CAP Rate), Cash-on-Cash, and Internal Rate of Return (IRR).
Click here for a rate of return calculator, and each valuation method is explained in further detail below:

Gross Rent Multiplier (GRM)

GRM = Property Value / Gross Rents

The GRM is a quick, easy way to value income property, but is perhaps the least accurate. The gross (total) rents are multiplied by a certain number (the GRM) to arrive at a value. For example, a property that generates $100,000 in annual gross revenue would be worth $1,000,000 to an investor who was looking for a property with a GRM of 10 (10 x $100,000 = $1,000,000).

A quick survey of what people are paying for properties and the gross incomes at the time would provide a general indication of what the trend in the market is for investors. However, the inefficiency stems from a lack of consideration of expenses. Clearly a property generating $100,000 of annual revenue with annual expenses of $500,000 would be worth a lot more than if the expenses were $950,000. Fortunately, there are more methods of income property valuation.

Capitalization of Net Income (CAP Rate)

CAP Rate = Net Income (NOI) / Property Value

The CAP Rate is a more accurate method and essentially represents the reate of return on an investment if you were to pay cash for the property. An APOD (Annual Property Operating Data) sheet is typically used to calculate income, expenses, debt service, and pre-tax cash flow. If properties are generally selling for an 8% CAP Rate, then a property generating $100,000 in net income would be valued at $1,250,000.(8% = $100,000 / $125,000)

Cash-on-Cash

Cash-on-Cash Return = Net Income / Down Payment (or Equity)

If a property generates $100,000 in net income and an investor's down payment is $250,000, then the Cash-on-Cash rate of return would be .4, or 40% (.4 = $100,000 / $250,000)

Internal Rate of Return (IRR)

The IRR method is based on NPV (Net-Present-Value) and considers pre-tax cash flow, after-tax cash flow, depreciation, overall return, and offer an assessment of a projected return from the property over a period of time (usually at least 5 years). It is the most intricate of all the property valuation methods, but provides a financial projection for holding the property over time.

Adjustments

Since no two properties are exactly alike, adjustments need to be made for differences in location, functionality, views, utility, restrictions, amenities, condition, and many other factors. For a professional property valuation fill out the form below and we will contact you at a time that is convenient for you.