![]() ![]() The 6-unit’s net operating income is $30,065. The formula for capitalization rate is the net operating income divided by the cost. “Capitalization rate” (or “cap rate”) is one of those things you hear all the time in the marketplace. But what about the other two parts of the money machine: expenses and financing? It doesn’t take either of these into account. Unlike the first two methods, the gross multiplier method does take income into account. Our gross multiplier formula is $390,000 cost divided by $56,715 gross operating income. Let’s say the gross operating income for our 6-unit example is $56,715. The third method is called “gross multiplier.” The formula is the cost of the property divided by the gross operating income. Again, it might be a way to test the wind, but it’s not very meaningful.įree Guide: Learn how to earn 5% more on each listing with this free checklist. It does not take into account income, expenses, or financing. In our example, it would be $390,000 cost divided by 6 units, which equals $65,000 per unit.Įverything we said about price per square foot can be applied to price per unit. ![]() The formula for the “price per unit” is the cost of the property divided by the number of units (typically apartment units). But, even then, you don’t have enough information to make a wise investment decision. Maybe the one good thing we could say about this method is it’s a way to “test the wind” by comparing the price per square foot of several different properties. Test question: Would a money machine costing $130.00 per square foot be a good investment? There’s no way to tell without knowing the income, expenses, and financing-which the price per square foot method ignores. For example, let’s say a $390,000 6-unit apartment building has 3,000 square feet. The first valuation method is “price per square foot.” The formula for price per square foot is the cost of the property divided by the number of square feet. So, doesn’t it seem logical that the most effective method of valuing a rental property would take into consideration all three parts? With that in mind, let’s look at five valuation methods used in the marketplace and discuss the pros and cons of each.Įnroll in Real Estate Investing: Beyond the Basics to learn about a sixth valuation method-one that allows you to identify the desired rate of return then work backward to calculate the optimal price. The value of that money machine is determined by how these three parts interact. It has three main parts: income, expenses, and financing. Successful real estate professionals should understand each system, so they’re able to communicate with many different buyers and many different sellers in many different situations.Ī real estate investment property is like a money machine. Keep in mind that there is no right or wrong valuation method. In this article, we’ll walk through several techniques and discuss the advantages and disadvantages of each. When estimating a property’s investment value, there are a variety of real estate valuation methods you can use. It’s not like valuing a house in which you are going to live. How do you determine the investment value of a property? Well, it’s an art. ![]()
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