Multifamily Property Valuation: 3 Appraisal Methods for an Apartment Building


By reading this guide, you will learn three commonly used apartment building valuation methods. Whether you’re asking “how much is my apartment building worth?” while selling your multifamily property it or you’re estimating a potential investment when buying, you can make good use of this guide.

For over 30 years of my commercial real estate career, I’ve worked with a lot of appraisers. At one time or another, I’ve had properties appraised using all 3 methods.

Read on to learn how to calculate the value of a multi-family property.


Method #1: Income Approach

Of the three methods used to perform an apartment building valuation, the income approach is the most appropriate method. The true value of the property to an investor will be the return that it generates on their investment. The income approach is based on that return.


Step-by-Step Multifamily Property Valuation Process

Some investors make decisions using gross income. This is highly inaccurate because it ignores your expenses and periodic vacancies.

If you had 100% occupancy and tenants were paying on time, the total rent you would collect is the Potential Gross Income (PGI).

Some rental units will be vacant from time to time. The percentage of units that are vacant on an annual basis is the property’s vacancy rate. This has to be applied to the PGI to find the gross income.

Multi-family real estate can have expenses that are 35% to 45% of the gross income. If the owner is responsible for all of their tenants’ utilities, the expense ratio could be as high as 50%.

When you’re estimating the value of a property, start with the potential gross income (PGI). Apply the vacancy rate for that market to the PGI. Next, deduct the estimated expenses to calculate the Net Operating Income (NOI). Now you can find the property’s capitalization rate.

The capitalization rate (cap rate) shows the return that you can make on your investment. To find the cap rate, divide the NOI by the property’s market value.

If you know the cap rates in the area for similar properties, you can divide the NOI you came up with by the cap rate to find the market value of the property.


Example of Multifamily Property Valuation Using the Income Approach

Now, how to compute how much is an apartment complex worth using the income method? If a 15 unit apartment building rents for an average of $800 per month per unit, the potential gross income (PGI) would be $12,000 a month, or $144,000 per year.

Assume that vacancy rates in the area equal 5%. Deduct $7,200 (5%) from the PGI. The gross income from this property is $136,800.

If your estimated expenses are 40% of your gross income, the NOI for this property would be $82,080.

We’ll use an average market cap rate of 9.6%. This property’s value would be the NOI ($82,080) divided by the cap rate (9.6%) which equals $855,000.


Consider Operating Expenses and Reserve Funds

Always keep up with how your expenses are affecting your property’s value. You should know what percentage of your gross income is going out in expenses.

Operating expenses may include:

  • Property management
  • Payroll/payroll taxes/payroll services
  • Property taxes
  • Liability and Hazard insurance
  • Utilities
  • Trash Removal
  • Snow removal (if needed)
  • Landscaping
  • Cleaning
  • Repairs and Maintenance
  • Maintenance contracts – HVAC, Pool, Elevator, etc.
  • Soft costs — legal fees, accounting fees, etc.
  • Reserves

You should maintain adequate reserves for maintenance and tenant turnover. The size of your reserves will vary depending on the condition and location of your property.

An older building or one with deferred maintenance will need a larger reserve. The size of the reserve should take into account scheduled capital improvements such as replacing the roof, plus unexpected repairs.

When a tenant moves out, you’ll have to repair or repaint the unit and market it for lease. You’ve lost rental income until the unit is rented. If the turnaround time in your market is several weeks, you may need more reserves than an owner whose property will rent in a few days.

If you are a buyer, the apartment building seller will provide you with financial statements that document the property’s income and itemize its expenses. You’ll also receive rent rolls that show the actual vacancy rate.

A profit and loss statement will either be a year-end statement or a year-to-date statement. If the property’s fiscal year-end was 6 months ago or longer, then a year-end statement is out of date. A year-to-date statement is more recent but it isn’t complete.

You’ll need to see a trailing 12-month statement, also called a T-12 or TTM (Trailing Twelve Months). This will show you the property’s most recent 12 months of income and expenses.

For investors learning how to make their first purchase, we also put together a guide with tips for beginners on buying their first apartment building or complex.


Value-Added Improvements

The value of your apartment property can be increased in a number of ways. Anything you do that increases your income is considered a value-added improvement.

This includes improvements that enable you to charge higher rents or amenities that generate income such as coin-operated washers and dryers. If you can charge new fees, that would add to your income and be categorized as a value add.

If you are making improvements that are part of scheduled maintenance such as the roof replacement mentioned above, that isn’t considered a value add. That kind of improvement is required just to maintain your business as it is.

If your property is older and out of date, you will eventually replace countertops, cabinets, perhaps flooring, with updated materials. If that is the expected condition in your current rent range, the improvements might not be called value add.

However, if your remodeling creates apartments that are in a higher classification or draw higher-paying tenants, it would be considered value-added improvements.


Method #2: Sales Comparison Approach

The sales comparison approach is just what it sounds like. You compare properties that have been sold and closed to see what similar properties are worth in that market.

Accurate information is critical when using the sales comparison approach.


How Sales Comparison Works

The property whose value you are trying to determine is the subject property. The sold properties that you are comparing it to are the comparables. You need at least 3 comparables for an accurate valuation.

The comparable properties should:

  • be as similar as possible to the subject property,
  • be located as close geographically as possible to the subject property, and
  • have closed as recently as possible.

Adjustments are made to the comparables’ sale price for differences they have with the subject property. If a comparable is larger, an amount per square foot is deducted. If it is smaller, an amount will be added.

Adjustments are made for land size, age, functional obsolescence, features, and sales concessions.

The adjustments are added up for each comparable. This positive or negative value is applied to the sale price. The average of the comparables’ adjusted price is the subject property’s market value.

For a true valuation, you need accurate information about the comparable properties and their sale transactions. For example, if a seller paid the buyer’s closing costs, that should be accounted for.


Where to Find Similar Properties’ Data

Public Records

Real estate ownership and transactions are a matter of public record. These records are maintained at the county level. Usually, you can find them at one of the following county offices:

  • Clerk of Courts
  • Tax Assessor
  • Register of Deeds
  • County Recorder

There is no national standard for this information. You should be able to find the address, parcel or tax map number, owner name and address, acreage, square footage, and current and previous tax values.

Some counties show the sales history of the property. Knowing the area’s appreciation rate is valuable for a review of the market.

Most records are available online. This lets you find and print copies of the records you need. Take the time to familiarize yourself with the records search process in your county.


Real Estate Platforms

There are commercial real estate (CRE) websites that act as a CRE listing service. These include MultifamilyCashin multifamily property marketplace, CoStar, LoopNet, Ten-X, Reonomy, and Transactly.

Some sites let you enter and look at properties for sale. You’ll see the location of the property and details such as the age of improvements, square footage, acreage, and features.

To access the comparable sales information that you need to estimate a property’s value, you may have to pay for a subscription. This will give you sale prices and concessions.

Some areas have a Commercial Board of Realtors that owns a commercial multiple listing service (MLS). You’ll have to be a member of the board to use their MLS.


Method #3: Cost Approach

The third method of evaluating a property is the Cost Approach. This method is based on the assumption that a property is not worth more than the cost to create it.

The cost approach is used when a property is new or there aren’t comparable sales available. If a property is considered special use, such as a church or a historical building, there may not be any recent sales of comparable properties.

When evaluating investment properties, the cost approach would typically be used if the improvements are new. You couldn’t use the income approach if the property didn’t have any actual income yet.

Instead of using the sale-related data of other properties as a guide, the cost approach uses the market cost of land and the cost to construct the improvements today. To account for age, depreciation is subtracted from these costs.

The formula for the cost approach is:

Value = Land Value + New Cost of Construction – Depreciation.

The value of the land is determined using the sale comparison approach. Your land value is the average of the sale price of similar properties that are close by and sold recently.

From that point, calculating a property’s value with the cost approach can be complicated.


4 Ways to Calculate New Construction Costs

There are four ways to calculate new construction costs:

  • Comparative Unit — The Comparative Unit Method uses a price per square foot (psf) for each area of construction. The appraiser chooses the price psf from 5 categories that are based on the type of construction. Then, they make their estimates based on the square footage of the improvements.
  • Segregated Costs — this method uses a more detailed breakdown of the construction. Instead of a price psf, this valuation uses the average cost of the component areas of construction.
  • Unit-in-Place — Unit-in-Place uses an even more detailed list of construction components. It also applies estimates of the builder’s costs and profits to the component costs.
  • Quantity Survey — This is the most detailed method yet. The Quantity Survey Method involves pricing every piece of material in the construction of the improvements. This is the way that the builder originally priced the job. This method also estimates the builder’s general conditions (overhead) and profit.

As you go down the list, each method is more detailed, takes more time, and results in a more accurate valuation.


Determining the Depreciation

Next, there are different ways to determine the depreciation of the property. Depreciation includes the wear and tear on the improvements, whether its functional use has become outdated, and if the area around the property has deteriorated in value.

There is more than one method to calculate depreciation. Some methods are more detailed, and more accurate than others. The older the property is, the more complicated the process to determine its depreciation.

The simplest way to figure depreciation is the Age-Life method. Divide the actual age of the improvements by their effective life. This gives you a percentage that is deducted from the value of the land and construction.

For example, assume that you’re using the cost approach to figure the value of an apartment building.

  • The comparable sales of similar sized plots of land average $70,000.
  • You’ve determined that the new construction cost would be $1,000,000.
  • The effective life of the improvements is 40 years and they were built 5 years ago. 5 years is 12.5% of the building’s effective life.

Finally, in our example, the land and new construction costs total $1,070,000. Subtract depreciation of 12.5%, or $133,750. The value of this property using the cost approach is $936,250.


Consider Hiring a Professional Appraiser

When buying an apartment building for multifamily real estate investing, after identifying a potential investment property among the apartment buildings for sale nearby, it’s best to have it appraised professionally, unless you are an experienced investor or appraiser. Most likely, you will be required to get a third party valuation report by your lender.

A professional appraiser can give you a definitive value on your property. Federal law requires appraisers to go through professional training and licensing.

Typically, appraisers are members of the local multiple listing service with access to the most recent comps. They also have current data on construction costs so that they can effectively perform a cost approach analysis if needed.

Commercial appraisals can cost as little as a few thousand dollars. Multi-building properties may run as much as $10,000. The largest properties could cost up to $25,000 to appraise. Some appraisers offer an owner’s appraisal for less. This involves using a less detailed format than a mortgage appraisal.

Use our national directory to choose from the best multifamily property appraisers near you. In this directory, we gathered reputable professionals throughout the United States who are experienced in apartment building valuation.


When You Don’t Need to Hire an Appraiser

If you are a seller, there is a simpler way to sell your apartment building fast and as is, without being required to hire an appraiser. You can sell it as-is to experienced cash buyers.

Professional multi-family property investors don’t have to meet a conventional lender’s appraisal requirements. The very best buyers won’t need to have a formal appraisal done at all.

Top buyers can inspect an apartment property and know what it’s worth and what it will cost to bring it up to market standards after buying it as is.

If you can locate reputable, experienced cash buyers for your property, that might be your best option. That’s where MultifamilyCashin can help.

MultifamilyCashin is rapidly becoming the premier marketplace where apartment building sellers connect with motivated cash buyers. We have put together a network of experienced, reliable cash buyers looking for properties just like yours.

We also have our own investment arm and may make you an offer ourselves.

We complete transactions:

  • fast
  • stress-free
  • at no cost to you.

We can assume all closing costs should you need it. You won’t have to come with your own cash to closing in order to receive cash from the buyer.

To receive your no-obligation, all-cash offer right away, give us a call. Or, use our Request a Cash Offer form to quickly tell us about your property. Just within a few days from a quick walkthrough we make all-cash offers. And sometimes, we make them on the spot, right during the viewing.

Contact MultifamilyCashin to sell your apartment building in the easiest and fastest way possible.

About the Author
Chris Valverde
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