Multi-Family (5+) Valuation

[Christopher Freeman]

So it is my understanding that multi-family properties that feature more than 4 units are appraised based on their NOI and Cap rate. I understand the math behind that, so no need to dig there.

My two questions are:

1. How to you determine the cap rate when the market value is the number you are trying to calculate (ie an unknown)? Is it just based on the contract price at time of sale, thereby permanently locking in the rolling market value cap rate of the property, or is it based on the cap rate of similar properties in the same market?

2. Does this valuation principle apply to all apartment buildings with 5 or more units, provided that all units are legal?

[Doug McLeod]

@Christopher Freeman Since cap rate represents a risk premium it fluctuates by market, property type and class, demand, etc. Commercial mortgage brokers handling transactions in the area can give you an idea of the cap rates they are using to underwrite similar properties in the market.