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, (or 9.71) =$499, (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

Before Tax Cash Flow

Cash on Cash Purchase Price$500,000 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