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3 Ways to Estimate the Market Value of Income Property

James R Kobzeff

There are three basic methods used by appraisers to determine the fair market value of income
producing real estate that real estate investors might find helpful when buying investment property.
In this article, we'll discuss how each one works and then show you how you would estimate the
market value of a subject income property based on each method.

Income Approach

The income approach method for determining a property's market value is where you use the return
you desire from your cash investment and then capitalize that percentage by the net operating
income being produced by the property.

Let's say, for example, you desire a 8.5 percent return on your investment and you estimate the net
operating income (NOI) for the subject apartment to be $38,500. Here's the computation:

$38,500 / 8.5 = $452,940

You would be willing to pay $452,940 for the apartment complex based upon its income stream
and your desired return on investment.

Market Data Approach

The market data approach makes use of a list of properties comparable to the subject property and
determines a property value-price per unit. In this case, these comparable properties should be in
similar areas, with similar apartment sizes, amenities, appearance and rent structures, and should
all be buildings that have sold recently.

You would then divide the prices at which each building sold by the number of units in each
apartment complex to determine an average price per apartment to use as a multiplier. The average
price per unit is then applied to the subject income property.

Let's say, for example, you create a list of six comparable apartment complexes in the local area
and determined that they sold for an average of $60,000 per apartment. By multiplying the $60,000
average unit price times the number of units in the subject property (we'll assume there are seven),
you arrive at market value of $420,000 based on the market value approach.

Cost Approach

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The cost approach method estimates what it would cost to replace the entire apartment complex. In
other words, what would it cost to buy the land and build a building identical to the subject
property?

First, you must determine the land value. If a study indicates comparable land is selling for $10 a
square foot and the subject property is on a 100 x 200 foot lot or 20,000 square feet, then the land
is worth $200,000.

Second, you must determine what it would cost to replace the site improvements such as the
parking area, lawn, shrubs, trees, etc. You determine it would cost about $30,000 to replace them.

Finally, you must compute what it would cost to duplicate the building. If the subject apartment
complex has seven one-bedroom apartments of 600 square feet each or a total of 4,200 square feet,
and it would cost $60.00 a square foot to build, then the cost of a replacement structure will be
$252,000.

The total cost of a new building is $200,000 + $30,000 + $252,000 or $482,000.

Okay, but the subject income property is several years old, so we must establish a comparable by
figuring a depreciated value on the $252,000.

In this case, assume the subject income property has depreciated 20 percent or $50,400. This would
leave a depreciated value for the building of $201,600. To this amount, add the $30,000 in site
improvements and the $200,000 land value, giving a total market value using the cost approach of
$431,600.

Our Estimate of Market Value

1. Income Approach:
NOI of $38,500 capitalized @ 8.5% = $ 452,940

2. Market Data Approach:

7 Units @ $60,000 per unit = $ 420,000

3. Cost Approach:
Land of 20,000 square feet @ $10.00 square foot = $200,000
Site Improvements = 30,000
Duplicated Building (less 20% depreciated value) = $201,600
Cost to replace property = $431,600

4. Final Estimate of Market Value = $440,000

It should be noted that the final line on the analysis is an estimate of market value. How did we

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arrive at it? We correlated all three of the appraisal methods and simply made a judgment by
putting a slightly heavier emphasis on the income approach. Other real estate investors might
arrive at a different estimate of market value, but you get the idea.

About The Author

James R. Kobzeff is the developer of ProAPOD® - superior real estate investment software since
2000. Do you want to work with rental property? Create complete and professional cash flow, rate
of return, and profitability analysis presentations in minutes! See how => http://www.proapod.com

©2 0 08 J ames R Ko bz eff . All r ig ht s r eser v ed.