Real estate appraisal for rental properties or commercial properties isn't the same as for single family homes. If you were looking at a 25 unit building, it would be difficult to find similar ones nearby that have recently sold. Therefore, a market analysis using comparable sales isn't normally used in industry.
It is also not idea to use replacement costs either. How do you figure replacement cost if there is no land for sale nearby with same zoning? This is used as a secondary method, though, and can tell you if maybe you should be building instead of buying.
Real Estate Appraisal Using Capitalization Rate
Investors buy rental properties for the income. Therefore it is the income that is used to determine value. The rate of return expected by investors in a given city gives you the capitalization rate, and this is what you use to accurately appraise an income property.
Start with the gross income. Subtract all expenses, but not including mortgage payments. If a building's gross income is $80,000 per year, and the expenses $30,000, you have a net before debt-service of $50,000. Now apply the capitalization rate to this figure.
If the common capitalization rate is .10, for example (ask a real estate agent), divide the income of $50,000 by .10, and you get $500,000. This is the value of the building. If the usual rate is .08, meaning investors in the area expect an 8% return, the value would be $625,000.
Easy Real Estate Appraisal?
Net income before debt-service, divided by the cap rate It really is a simple formula. The tough part is getting accurate income figures from seller. Is the seller showing you ALL the normal expenses, and not exagerating income? If he or she stopped repairs for a year, and is showing "projected" rents, the income figure could be $15,000 too high. This would mean the building is worth $187,000 less (.08 cap rate) than your appraisal shows.
Another thing smart investors would consider doing when buying, is to separate out income from vending machines and laundry machines. If these provide $6,000 of the income, that would add $75,000 to the appraised value (.08 cap rate). Do the appraisal without this income included, then add back the replacement cost of the machines (probably much less than $75,000).
Be careful when using any real estate appraisal method. No formula is perfect, and all are only as good as the figures you plug into them. Used wisely, though, real estate appraisal using capitalization rates is one of the most accurate methods.
If you are looking to invest anywhere in Greater Toronto Area (GTA) in gas station, motel, hotel, multi-unit building or commercial plaza call your real estate investment expert Witty Singh @ (647) 274 7572