How do you Value your Real Estate Business???

[David Zheng]

Was looking for ways to value your buy and hold real estate business if you were lets say pitching it to investors or even if you were to sell it.

Obviously the go to answer is... how much do you think your properties are worth but I think it goes deeper.
you are selling the tenants in it, the processes, management systems, etc. etc.

I understand you might say...well I just use a GRM on each property's CF and then a little on top for my processes. But let's say you are awesome and get tenants paying $3000/month on a $100k house where other similar properties are only getting $1000/month (total exaggeration but you get the point)

Obviously I don't think assets- liabilities is a good way especially if you are financing everything.

So now what?

use  DCF approach? your total net cashflow/ treasury rate?
GRM on total gross rents?

Thanks for your inputs!

[Rogers Smith]

@David Zheng In another life I was a banker/M&A specialist. A lot of what you asked depends mainly on the size of your operation, the management systems in place, and the skills and smarts of your management team. A lot of small businesses, especially in the construction space, are simply one to five man operations, with the owner playing an integral roll. Remove the owner, and the enterprise shuts down. These types of businesses, even if they are wildly successful have little value beyond the book value of the assets.

When we would consult with these types of companies we would invariably recommend the owner endeavor to divorce himself from the business over time. This process would include developing or buttressing management systems, delegating most of the owner's current activities to other staff members, grooming a second and third in command, and instructing the owner to take a lot of days off. Over a reasonable amount of time, the company would begin to run itself. In a way it would be similar to what we call in rentals a "turnkey" investment.

This is how a business builds value over and above its assets. We call this intangible value. Without it, most small businesses will be worth no more than the book value of their assets.