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Real Estate Appraisal - Rental Properties

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					                     Discover 101 Amazing Real Estate Tips and Secrets



                   Real Estate Appraisal - Rental Properties

Real estate appraisal for rental properties isn't the same as for single family homes. If you
were looking at a 24-unit building, it would be difficult to find similar ones nearby that have
recently sold. Therefore, a market analysis using comparable sales isn't normally used.

It is also not ideal to use replacement costs either. How do you figure replacement cost if there
is no land for sale nearby with proper zoning? This is used as a secondary method, though,
and can tell you if maybe you should be building instead of buying.

Real Estate Appraisal Using Capitalization

Investors buy rental properties for the income. Therefore it is the income that is used to
determine value. The rate of return expected by investors in a given area gives you the
capitalization rate, and this is what you use to accurately appraise an income property.

Start with the gross income. Subtract all expenses, but not including loan payments. If a
building's gross income is $82,000 per year, and the expenses $30,000, you have a net before
debt-service of $52,000. Now apply the capitalization rate to this figure.

If the common capitalization rate is .10, for example (ask a real estate agent), divide the
income of $52,000 by .10, and you get $520,000. This is the value of the building. If the usual
rate is .08, meaning investors in the area expect an 8% return, the value would be $650,000.

Easy Real Estate Appraisal?

Net income before debt-service, divided by the "cap rate:" It really is a simple formula. The
tough part getting accurate income figures. Is the seller showing you ALL the normal
expenses, and not exagerating income? If he stopped repairs for a year, and is showing
"projected" rents, the income figure could be $15,000 too high. This would mean the building is
worth $187,000 less (.08 cap rate) than your appraisal shows.

Another thing smart investors do when buying, is to separate out income from vending
machines and laundry machines. If these provide $6,000 of the income, that would add
$75,000 to the appraised value (.08 cap rate). Do the appraisal without this income included,
then add back the replacement cost of the machines (probably much less than $75,000).

Be careful when using any real estate appraisal method. No formula is perfect, and all are only
as good as the figures you plug into them. Used wisely, though, real estate appraisal using
capitalization rates is one of the most accurate methods.




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