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Property Valuation. Dr. Arthur C. Nelson, FAICP February 19, 2007. Overview. Market Comparison Approach Cost Approach Income Approach Rules of Thumb Ratio Analysis. Market Comparison Approach. You want to buy a 20 unit apartment. How much should you pay?. Cost Approach.
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Property Valuation Dr. Arthur C. Nelson, FAICP February 19, 2007
Overview • Market Comparison Approach • Cost Approach • Income Approach • Rules of Thumb • Ratio Analysis
Market Comparison Approach You want to buy a 20 unit apartment. How much should you pay?
Cost Approach • Cost to replace or reproduce • Variety of methods to estimate • - Depreciation • Physical deterioration • Functional obsolescence • Economic obsolescence • + Land value
Income Approach V = I/R V = Value I = Net Operating Income, NOI R = Capitalization Rate
Steps 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 Application PGI $ 80,640 VBD - 4,032 MI + 1,000 EGI $ 77,608 OE - 29,100 NOI $ 48,508 R @ 0.0971 (or 9.71) = $499,500 R @ 0.1075 (or 10.75) = $451,200
Rules of Thumb Overall Capitalization Rate R = NOI/V Net Income Multiplier NIM = V/NOI Gross Income Multiplier GIM = V/PGI or V/EGI Equity Dividend Rate, “Cash on Cash” EDR = BTCF / Equity
Cash on Cash Purchase Price $500,000 Equity @ 30% $150,000 BTCF $ 4,273 EDR, Cash on Cash 2.85%
Ratio Analysis Loan to Value Ratio Mortgage Amt / Value, or Mort. Outstanding / Value Debt Coverage Ratio DCR = NOI/DS Default Ratio DR = (OE + DS) / EGI Operating Expense Ratio OER = OE / EGI