Increasing the Value of an Apartment Complex? HELP - Posted by Mark

Real Estate Investing Apartments
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Posted by Karen Hanover on December 11, 2009 at 17:32:09:

Hi,
I agree with Ray about its current value being off and your method of calculation but I understand what you mean. Yes, IF, if, if the current value is correct, the building is technically valued at $802,400.

To be technically correct, you would add the extra income to the Potential Rental Income, back out the vacancy and credit losses and then ACTUAL expenses to leave you with NOI which is capitalized at the current market cap rate.

Translation/simplification:
Your net increase to the income is $360 per unit x 7 units = $2,520 per month or $30,240 annually. Simply divide $30,420 by the current cap rate to get the ADDITIONAL value to building based on the increased income. Then add it to the $500K to get the new value.

Example:
If the cap rates in the area are 10 then
$30,420/.10 = $302,000.
Based on the increased income you added value of $302,400.

You have made the assumption that the cap rate is 10 which may, or may not be correct but I’m going with your example. Additionally, as Ray said, who made the arbitrary decision that it should be valued at a 10 cap or that the building is based on ACTUAL operations??? Sounds fishy to me…

When added to the existing value, the building would then be valued at $802,400.

Again, I agree with Ray. If you are considering buying this building you MUST familiarize yourself with the basics as Ray said and even more or you will lose your shirt. Never invest in something you don’t COMPLETELY understand.

I hope this helps!
Karen Hanover, CCREA, CCIM Candidate

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Increasing the Value of an Apartment Complex? HELP - Posted by Mark

Posted by Mark on November 30, 2009 at 06:39:17:

I found a 20 unit apartment complex valued at $500,000 currently. There are 7 units that are vacant and the price is based on what is rented now.

If I get the other 7 units all rented out at $400 each plus the tenants will be paying gas and electric. My expenses would increase for water and sewage.

Now is the new value on the property going to be $400 X 7 units = $2800 gross per month minus the water and sewage which should be about $40 for each apartment.

$2800-($40 x 7= $280) WHICH NOW GIVES us $2520 per month.

$2520 X 12 months = $30,240

$30,240 X 10 years = $302,400

Is $302,400 the new added gross value on this property? Or do I have to subtract 45% for expenses??? This is where I am confused.

Is $802,400 the new value of this property based on a 10% CAP?

Please help me out if you can! Thanks!

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Valuation - Posted by ray@lcorn

Posted by ray@lcorn on December 01, 2009 at 19:28:58:

Mark,

You need to familiarize yourself with the basics, starting with how to calculate Net Operating Income (NOI). Your example is wrong on all counts.

From the few details supplied, an estimated valuation would use the following numbers:

13 units occupied x $400 per month = $5200 x 12 = $62400 gross income
Estimate expenses at 40% of gross = $24960
NOI = $37440
Valuation at a 10% cap rate = $37440/10% = $374,400

However, instead of using a percentage for expenses you need the actual expenses. Never assume the seller is representing the property correctly. Also, a complex with a 35% vacancy rate likely has some deferred maintenance issues, and may not support a 10% cap.

For a quick primer on how to value income properties see this article:

http://www.creonline.com/articles/art-216.html

ray

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Re: Increasing the Value of an Apartment Complex? - Posted by Mark

Posted by Mark on December 01, 2009 at 19:05:55:

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