It’s one thing to calculate the value of a single-family dwelling, but the process can seem a little more complicated when it comes to multifamily properties. If you have ever wondered how to value your commercial multifamily property, here’s what you need to know.
There is a fairly simple formula that most commercial multifamily real estate owners and realtors specializing in this type of property used to calculate a base figure for valuation. This is as follows:
Current market value = capitalization rate / net operating income.
So, how do we calculate the capitalization rate and net operating income?
The capitalization rate, or cap rate, refers to the rate of return that an investor could expect should they purchase the property with cash. The formula that is used to calculate capitalization rates is simply:
Net operating income / property value = cap rate.
Net operating income divided by property value. However, since you are trying to estimate the current market value, it’s recommended that you estimate the cap rate by reviewing the recent sales of comparable properties and calculate their cap rate, based on the NOI at the time of sale and the sale price. It may then need to be adjusted depending on current market conditions and your realtor will be able to help you with this step since they will be aware of how the market is behaving at that moment in time.
Net operating income (NOI) is a figure that is calculated by summing gross rents and other income generated by the property, and then subtracting all expenses involved in operating the property, including but not limited to:
It’s important to note that any debt service of loan payments is not included in the expenses, since these do not affect the property's value.
If you are considering selling your multifamily property, we strongly advise that you consult with commercial property experts to confirm your estimation of its value, since they will understand the current market and where your property fits into it. They may also be able to advise you if there are any improvements that could be made to increase the potential return on investment of your property which could push up the value.
Contact Randazzo Builders in Sorrento, Florida today to talk more about the values of multifamily properties at (888) 281-4983.