Value of existing apartment complex

[John Kabot]

Just curious how everyone establishes value of a given operating apartment complex.  I have an eight unit complex that rents for $575 a month per unit.  Built in 1977 and somewhat updated. I put a new roof, windows, paint, flooring, Appliances, and sealed the parking lot.  I was told you take the gross rent for the year ($4600 a month times 12)  add a zero to the end and that's the value.  Anybody have a more scientific method?  (Net is about $3600 a month)

[Marc C.]

For an experienced owner, this seems like a really basic question. But I like Grant's Pass, so let's figure it out. The value of your "property" isn't really based on its physical characteristics, location, upgrades, etc....it's based on its cash flow stream: I don't want your building, I want its cash flow. It's a business. 

You mentioned your rents: 8 units x $575 =  of $4600/mo. x 12 = $55,200. What are your expenses and vacancy rate? Since I don't know knowing those, let me propose that today we use the 50% rule: $27,600/year. $55,200 rents - $27,600 expenses/vacancy = $27,600. To that, we need a cap rate. Oregon is a "hot" market for Californians with too much money. Selling a building in Grants Pass to them at a 7% cap rate should be a no-brainer, because these folks are quite happy to pay 5.5% for a Portland, Eugene, or Bend building. So, simply divide the Net Operating Income by .07. $27,600/.07 = $395,000. 

That's still a rough estimate. We would need your expenses and vacancy to compute the value in detail. But apartments typically have expenses in the 40-45% of rent range. In addition, we'd need to verify that a 7% cap rate is realistic for your market. You could call an appraiser or a Medford commercial broker for help. You can also check other people's listings on your commercial MLS and on Loopnet. But I still would speculate that 7-8% is the correct number for your area. The higher the cap rate, the lower the price.