property valuation
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Property Property ValuationValuation
Dr. Arthur C. Nelson, FAICPDr. Arthur C. Nelson, FAICP
February 2010February 2010
OverviewOverview• Market Comparison Approach• Cost Approach• Income Approach• Rules of Thumb• Ratio Analysis
Market Comparison ApproachMarket Comparison Approach
You want to buy a 10 unit apartment.How much should you pay?
Cost ApproachCost Approach• Cost to replace or reproduce
– Variety of methods to estimate
• - Depreciation– Physical deterioration– Functional obsolescence– Economic obsolescence
• + Land value
Income ApproachIncome Approach
V = I/RV = I/RV = ValueV = ValueI = Net Operating Income, NOII = Net Operating Income, NOIR = Capitalization RateR = Capitalization Rate
StepsSteps Potential Gross Income (PGI)- Vacancy, Bad Debt Allowance (VBD)+ Miscellaneous Income (MI) Effective Gross Income (EGI)- Operating Expenses (OE) Net Operating Income (NOI)÷ Capitalization Rate (R, or Cap Rate)= Market Value
Example ApplicationExample Application
PGI $ 80,640VBD - 4,032MI + 1,000EGI $ 77,608OE - 29,100NOI $ 48,508R @ 0.0971 (or 9.71) = $499,500R @ 0.1075 (or 10.75) = $451,200
Rules of ThumbRules of ThumbOverall Capitalization Rate
R = NOI/VR = NOI/VNet Income Multiplier
NIM = V/NOINIM = V/NOIGross Income Multiplier
GIM = V/PGI or V/EGIGIM = V/PGI or V/EGIEquity Dividend Rate, “Cash on Cash”
EDR = BTCF / EquityEDR = BTCF / Equity
Before Tax Cash FlowBefore Tax Cash Flow
Cash on CashCash on Cash
Purchase Price $500,000Equity @ 30% $150,000BTCF $ 4,273EDR, Cash on Cash 2.85%
Ratio AnalysisRatio Analysis
Loan to Value Ratio
Mortgage Amt / Value, orMortgage Amt / Value, or
Mort. Outstanding / ValueMort. Outstanding / ValueDebt Coverage Ratio
DCR = NOI/DSDCR = NOI/DSDefault Ratio
DR = (OE + DS) / EGIDR = (OE + DS) / EGIOperating Expense Ratio
OER = OE / EGIOER = OE / EGI
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