How to Determine the Value of Apartment Properties

Unlike SFR (single family residentials), commercial multifamily and apartment properties are value based on how much income it generates and the cap rate.

Key financial concepts

NOI (net operating income)

The NOI is the amount of money left over after expenses. These expenses are usually.

• property management fees
• utilities
• maintenance and repairs
• insurance
• property taxes
• landscaping and janitorial services

What is not included in your expenditures are

• debt service
• income taxes
• CapEx
• depreciation and amortization
• brokerage lees / leasing commission

Capitalization Rate

You can get the cap rate of a property by taking the NOI and dividing it by the market value or sale price. The cap rate is generally used to see the potential cash-on-cash return for a property. The higher the cap rate the higher the risk.

You can find cap rates in your area by talking to a broker or an appraiser. You can also use sales comps to see how much other similar properties were sold for.

Real-World Example: Estimating property value with cap rate

Imagine you own a small rental property that you’re thinking about selling, or you’re considering buying a new one.

1. Determine the Net Operating Income (NOI):
   • You’ve calculated that the property generates $30,000 in annual rental income.
   • After subtracting operating expenses (like property management fees, maintenance, property taxes, etc.), you’re left with a Net Operating Income of $20,000.
2. Find the Cap Rate:
   • Let’s say similar properties in your area are typically sold with a cap rate of 8%. This is a common cap rate for similar rental properties various markets around the United States.
3. Calculate the Property Value:
   • Use the cap rate formula to estimate the property’s value. The formula is:

Property Value = NOI / Cap Rate (20,000 * 0.08)

• First, convert the cap rate percentage to a decimal. An 8% cap rate is 0.08 in decimal form.
• Plug the numbers into the formula

So, based on an 8% cap rate and a Net Operating Income of $20,000, the estimated value of your property would be $250,000.

Final Thoughts

Net Operating Income (NOI): This is how much money you make from the property after paying all the operating expenses.

Cap Rate: This is a percentage that tells you what return you can expect on your investment. A lower cap rate typically means a higher property value, and a higher cap rate means a lower property value.

In simpler terms, the cap rate helps you figure out how much a property should be worth based on how much money it makes. The higher the NOI relative to the cap rate, the higher the property value.