Looking for info and advice on valuating apartment buildings.

[Todd Moriarty]

Hi,

I'm a new real estate investor looking for info and advice on valuating apartment buildings. What's the best approach? Analyzing cap rate? Gross rent multiplier? Price per unit? Price per square foot?....is one better than another? I've read different opinions on this and see huge swings in price and can't find anything definitive. Then I can't find decent comps. What's the best place for comps? I have many questions....lots of gray areas. Lots of interest in this field but many unanswered questions.

[Nick B.]

Originally posted by @Todd Moriarty:

Hi,

I'm a new real estate investor looking for info and advice on valuating apartment buildings. What's the best approach? Analyzing cap rate? Gross rent multiplier? Price per unit? Price per square foot?....is one better than another? 

The purpose of analysis is to answer a question: is this a good deal?

First, define a good deal by stating desired ROI. It is a combination of cash on cash return and capital gains. IRR is also helpful to account not only for returns but for their timing.

E.g 10% cash on cash and 100% capital gains in 5 years. Or 20% IRR. Or 20% IRR with all initial capital returned in 3 years via refinance.

Then find current and market rents, actual and projected expenses for the subject property.

Calculate a projected stable NOI. Subtract desired capital gains. Subtract upfront capex costs. That's your highest offer price. Calculate your desired returns based on these assumptions. If they are at or above desired ROI make an offer.

The whole calculation process is done in a spreadsheet. I found a good one in Steve Burges book "Buying and Selling Apartment Buildings" and tweaked it to my taste. If you have not read this book, it's a must.