Multifamily Property Valuation Calculation

[Davit Gharibyan]

Hi can someone help me with valuing a property. I use actual income. Would you use actual vacancy as well? The deals I am looking at have low vacancy. If I buy the property and increase the rents the vacancy would go up.

My confusion is,

1. Would I calculate based on actual current income and vacancy?

2. Actual potential income and my projected vacancy?

3. There is even a school of thought to use market rents then deduct 10% vacancy, then 50% expenses and that should give you NOI (rule of thumb).

I search over and over on internet and in books, but there is no definite answer.

Any clarifications are appreciated.

[Greg Dickerson]

@Davit Gharibyan you should underwrite the deal based on actual income and expenses as is so the vacancy is factored in. That shows you how the property performs as is. 

Next step is to proforma your assumptions. I would not use rules of thumb for detailed analysis. Use actual information and area averages for rents and vacancy. Do not assume you will outperform the averages in the market.

You also need to run some scenario analysis to make sure you can weather a downturn or economic event.

Once you do these calculations you can formulate your offer based on your return requirements.