How To Evaluate Investment Properties.
There are five primary valuators that investors and brokers use to communicate the value of a property.
Price/Square foot: Total Rentable Square Footage / Purchase Price
The Great Equalizer! When comparing properties, it’s important to at least keep an eye on cost per square foot. This gives you a concrete number as compared to other properties regarding the value of your property purchase/sell.
Price/Unit: Total Number of Units / Purchase Price
Easy valuator to calculate, not the most effective valuator when comparing to other properties. Unless you are comparing your property to other properties with the EXACT SAME unit mix (define) that are the exact same size, the price/unit will not be as helpful.
Cash on Cash return: Annual pre-tax cash flow / Total Cash Invested
In other words, How much cash did I put up vs. How much cash do I get back every year. Everybody wants to know what their return on investment is but a cash on a cash return is just a projection at best. Remember, real estate is longer investment game than most. Your initial cash return is important to consider but upside in income and future cash flow (proforma) should also be evaluated when determining your property’s value.
Gross Rent Multiplier (GRM): Purchase Price / Gross Income
Probably the most often used valuator on apartment buildings since the emphasis is on income. While income can be more predictable on multi-family, operating expenses can vary widely between buildings and owner business decisions. As with cash-on-cash return, it’s always important to also consider whether rents are already maximized or if there is plenty of upside to be obtained.
Capitalization Rate: Net Income/Purchase Price
This valuator is most effectively used with retail centers and office buildings because the income/expenses are more fixed on these product types with less variance than multi-family. CAP rates are reflected as percentage. The higher the CAP rate, the greater the return.
Just like any investment, the value of your investment property is affected by general market trends, perceived risks and desirability, financing options, and recent sales comparables. Pricing your property is a STRATEGY and also a bit of an art form! Please don’t rely on information from the internet to get the value of your property or a property that you are interested in buying. An experienced commercial agent who specializes in the product type and area is your best resource to properly advise you.
We hope this information has been helpful! Come back next week to find out Ten Questions to ask your Real Estate Broker before you hire them.