Determining the value of an apartment complex for sale before buying is the best way to get value for your money. You can use different approaches to determine the value of an apartment building. Examples of these approaches are the income approach, the sales approach and the replacement method.
The sales approach
This approach looks at other comparable apartment buildings and what they have sold in the past within the same area.
The replacement method
This approach looks at the cost of constructing the property from scratch, given the labor costs, construction costs and more.
The income approach
This valuation approach looks at the profitability of the property based on expenses and income.
The income approach is a heavy-weight way of assessing the value of a property because the bank will be investing in a business and not just a commercial property. When assessing an apartment complex’s value using the income approach, there are a few terms to remember. These terms are Cap Rate, ROI, and NOI. The net operating income or the NOI is the most important.
Calculating the NOI of a property
When calculating the net operating income of a commercial property, you should follow the following steps.
Determine the total income
When determining the total income of a property, you should add up all the sources of income. These could be rent from tenants, parking charges, coin-operated laundry machines, late charges, vending and candy machines, and other sources of income. So, do not just buy a property from a property buy sale platform without determining the total income of the property.
Determine the expenses
A commercial property can have a lot of expenses including security, utilities, property management charges, taxes and insurance, tax collection, pool service and trash collection. The mortgage payment isn’t included in determining the NOI.
Determine the Cap Rate of the property
You can do three things to determine the Cap Rate of the property. You can ask commercial brokers that are familiar with the area of the apartment complex. You can also research similar properties that were recently sold in the area. Another way is to ask local commercial lenders who have given loans in the neighborhood.
Determining the value of the building
After having a good idea of the Cap Rate, you can calculate the value. For example, if you’re using a cap rate of ten percent. To find the value, you should divide the NOI by 10 and get the price tag of the property.
Conclusion
There is no one way to find the value of a property. Serious investors will look at components from all these methods before making a decision. Learning these valuation concepts is an important step if you want to become a commercial real estate investor.
After finding a property that you can make money from, you should find the best interest rate for your apartment complex for sale. There are tools that can help you find the interest rate. These tools will give you concrete figures to help you value a property.
