It is essentially a function of risk and return. Those new to this methodology may think it is counter-intuitive, but it really does make sense. If the cap rate were 6.3%, it would actually decrease the value of the property to $6,919,047. Take the NOI and divide it by the cap rate. With this information, it’s now simple to determine the property’s value. By averaging all those cap rates in a market, you are able to get a good feel of that market’s cap rate. Both the purchase price and NOI are known variables at the time of purchase, thus revealing the cap rate for that property at that moment in time. Each property will have its own cap rate at the time of sale and is calculated using the same formula as above. Commercial real estate lenders, brokers, and appraisers should have this information, especially for markets they service.Ī market cap rate is the average of the cap rates for similar property types in a specific geographic region. The second piece of the puzzle is determining what the capitalization rate (often referred to as Cap Rate) is for the market where the property is located. Either way you need an annual NOI figure for this calculation. ![]() You can also use the most recent annual numbers if that is all that is available. I would recommend using the trailing 12 (T-12) month operating totals to get the most accurate read on property value. This choice influences net cash flow to the owner(s) but does not affect the property’s value. Why is this?īecause different owners will choose a wide variety of capital and debt structures to finance their property based on their goals, objectives and credit worthiness. Properties are valued as if no debt were involved. Expenses include any and everything required to operate the property such as:Īny debt service or loan payments are not included in the expenses. NOI is calculated by summing gross rents and other income generated by the property and then subtracting all expenses. Your operating data should include annual NOI (Net Operating Income) numbers. The value of commercial multifamily real estate (5+ units) is largely derived from an income approach appraisal based on a simple formula for valuing commercial real estate:Ĭurrent Market Value = Capitalization Rate / Net Operating Income ![]() As long as you have good operating data on your property, you have all you need. Have you ever wondered how to value your commercial multifamily property? Here’s the good news: it’s relatively easy to calculate.
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