The appraisal industry offers techniques for determining whether an investment is likely to be profitable. An investment appraisal may look at internal rates of return, net present value, average rate of return, or other metrics in order to gauge whether the investment should be considered worthwhile.
Are you an investor buying apartments in Detroit or other South Eastern Michigan markets?
Valuing an apartment building is one of the biggest challenges that commercial real estate investors face.As a real estate investor, you have a unique need that separates you from other real estate buyers and sellers: The need to make a profit, usually from rental income.
There are different types of real estate investment. Some, such as house flipping, don’t rely heavily on income. But if you’re looking into owning an apartment building, it’s the potential rental income that you need to look at.At Appraisal Experts Of Michigan, we use several key metrics for calculating the value of a home in terms of income generated:
Gross Rent Multiplier = Price / Potential Gross Income
As shown in the formula above, the gross rent multiplier is calculated by taking the price of the property and dividing it by the potential gross income of the property. Also, notice that if we rearrange the above formula we can solve for the price of the property:
Price = Potential Gross Income * Gross Rent Multiplier (GRM)
The gross rent multiplier can be used to identify opportunities by filtering out properties with a low price relative to the market based gross potential income. The gross rent multiplier can also be used to value a property by using the GRMs of very similar properties in the same market area.
Using Capitalization Rate (cap rate) to estimate value:
When using capitalization rate to value an income property, we use the property’s net income, and there is an inverse relationship between the asking price and cap rate.
If a property will be used to generate income from rents or leases, the income method of valuation is most commonly used. The net income generated by the property is used in conjunction with certain factors to calculate its market value if sold.
Gross Rent Multiplier (GRM) uses the gross rentals of a property rather than the net operating income. There are two ways to do this calculation; Gross Potential Income (GPI) and Gross Operating Income (GOI). As can be seen from the calculations of each, the value estimate is much better using Gross Operating Income, as losses for occupancy can result in incorrect GPI valuations.
Appraisal Services For Residential Real Estate Investors
- Service for out-of-state investors
- Residential Home Portfolio Appraisal