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```					     Property
Valuation
Dr. Arthur C. Nelson, FAICP
February 2010
Overview
• Market Comparison Approach
• Cost Approach
• Income Approach
• Rules of Thumb
• Ratio Analysis
Market Comparison Approach

You want to buy a 10 unit apartment.
How much should you pay?
Cost Approach
• Cost to replace or reproduce
– Variety of methods to estimate
• - Depreciation
– Physical deterioration
– Functional obsolescence
– Economic obsolescence
• + Land value
Income Approach

V = I/R
V = Value
I = Net Operating Income, NOI
R = Capitalization Rate
Steps
Potential Gross Income (PGI)
- Vacancy, Bad Debt Allowance (VBD)
+ Miscellaneous Income (MI)
Effective Gross Income (EGI)
- Operating Expenses (OE)
Net Operating Income (NOI)
÷ Capitalization Rate (R, or Cap Rate)
= Market Value
Example Application
PGI                       \$ 80,640
VBD                       - 4,032
MI                        + 1,000
EGI                       \$ 77,608
OE                        - 29,100
NOI                       \$ 48,508
R @ 0.0971 (or 9.71) =    \$499,500
R @ 0.1075 (or 10.75) =   \$451,200
Rules of Thumb
Overall Capitalization Rate
R = NOI/V
Net Income Multiplier
NIM = V/NOI
Gross Income Multiplier
GIM = V/PGI or V/EGI
Equity Dividend Rate, “Cash on Cash”
EDR = BTCF / Equity
Before Tax Cash Flow
Cash on Cash

Purchase Price      \$500,000
Equity @ 30%        \$150,000
BTCF                \$ 4,273
EDR, Cash on Cash       2.85%
Ratio Analysis
Loan to Value Ratio
Mortgage Amt / Value, or
Mort. Outstanding / Value
Debt Coverage Ratio
DCR = NOI/DS
Default Ratio
DR = (OE + DS) / EGI
Operating Expense Ratio
OER = OE / EGI

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 views: 4 posted: 2/10/2012 language: English pages: 15