Proforma Future Property Value, Cap Rate or Appreciation

[Jared Foster]

Curious how people model future property values for multi-family investments. Seems that there are two approaches. 1. Based on Appreciation 2. Based on Rental Income I generally struggle with Cap Rates and whether I should use them to value property, but it seems everybody else does, so it may not matter what I think. Anyway in a pro-forma I am trying to decide if I should use income and cap rate to back-into an estimated selling price for a property or make an assumption about appreciation. Thanks, Jared

[Joel Owens]

Are you trying to buy or trying to sell??

Are you looking at 2 to 4 units or commercial 5 plus units??

1-4 residential for appraisal purposes puts more weight on the comparable sales approach. 5 plus units more consideration is put on the income approach for valuation.

The purchasers who buy breaking even and hoping for strong rent growth year over year to create eventual cash flow are speculators and not investors. This is just like playing the lottery. In some overheated markets with cap compression you might be stuck with a situation like this unless you buy in another market.

Look at the cap rate versus the debt you can obtain for the spread and then calculate in conservative rent increases. You want to buy the property not pushing rent rates at the top of the market.

For instance the going rate per unit 2 bed for that area is 650 but you buy a property at a 9 cap at 600 rent. When you go to increase every year you will typically get less resistance as you are the best or one of the best deals in town. Older buildings pushing top of the market rents usually experience more tenant turnover and damage to the units and repair costs so the net affect is they do not see all of this extra cash flow they were hoping for.