I need help determining the market value on my apartment complex

[Steve Davis]

I am building an 18 unit apartment complex late spring to be completed in 2023. I live in Canada. So cap rates are generally low, construction costs are high thus the overall real estate in my market and City I live in is expensive. I am looking to sell my building in and around the $8.5MM range. A 16 unit apartment in the same area as where I am building got listed a few days ago for $5.5MM. This building was built in 2014 (out dated see pictures) and the City was completely different and small town vibe even if it was only 8 years ago. Rents are significantly under rented. Below is my pro forma for the two properties the one I am building is Bevan Ave. From an income approach the numbers work for me but from a cost per unit approach it does not. I am wondering which method I should be more dependent on. Please feel free to read below and help me out. Thank you.

Sutherland Ave Apartment

List price: $5.5M

16x units

Year Built: 2014

Similar location to future Bevan Ave development

Laminate, old carpet, outdated … could almost say it needs renovations. See pics

Gross annual income: $250k

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Using income approach with cap rate

$250k x 0.8 = $200k / 0.0366 = $5,464,480 value (3.6 cap rate with 20% operating expenses (newer building but still operating expenses quite low))

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Future Bevan Ave development

Desired price: $8.5M

18x units

Year built: 2023

Finishes: Quartz, new

Projected gross annual income: $384k

Using income approach with cap rate:

$384k x 0.8 = $307,200 / 0.0366 = $8,393,442 (3.6 cap rate with 20% operating expenses (brand new building 20% operating expenses more realistic)

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Comparing the properties by gross income. $384k (Bevan) - $250k (sutherland) = $134k x 0.8 = $107,200 / 0.0366 = $2,928,961 therefore Bevan is $3MM more valuable. Strictly from an income point of view.

INCOME APPROACH VS COST PER UNIT !!!??

My concerns…

SUTHERLAND: 16x units at $5.5MM is $343,750 per unit …

Therefore Bevan has 2 more units so … $343,750 x 18 = $6,187,500

What is a more valuable and an accurate measurement? cost per unit or income approach using cap rate?

Any information and input is appreciated! Thanks!

[Ben Leybovich]

You are using so many assumptions that it's hard to offer any legitimate advice. I will say this - for $25,000 per unit (i.e. $400,000 total), someone could buy a 16-unit building for $5.46M and renovate to be all in for under $6M with finishing surfaces close to what you are proposing for your new construction.

Now, if this allows them to achieve the same rents as what you are proposing, then you can clearly see the problem - their valuation, all things equal will be same as yours. With a lot less risk and a much lower basis. 

But, let's say they will not be able to hit your numbers. Let's say they do 50% and add about $70,000 to their income, for a total of $320,000. At 3.66 cap their valuation will still be almost $7M: $320,000x.8/cap rate of 3.66

Brand new product is special, no question. But, where is that line in the sand? How much will someone pay extr4a for something that's new? Specifically, on a risk-adjusted basis...