How is multifamily real estate valued?

In this article we will break down the different ways that multifamily real estate is valued.

There are several methods that can be used to determine the value of multifamily real estate:

1. The income approach: This method involves estimating the present value of the expected future cash flows that a property will generate. To do this, an appraiser will estimate the property's potential income (e.g. rental income) and expenses (e.g. property taxes, insurance, maintenance), and then discount that cash flow stream to its present value using a discount rate.

2. The comparison approach: Also known as the market approach, this method involves comparing the subject property to similar properties that have recently sold in the same market. To value a property using the comparison approach, an appraiser will identify comparable properties, or "comps," that have recently sold in the same market and are similar in size, location, and other relevant characteristics. The appraiser will then adjust the sale prices of the comps to account for any differences between them and the subject property, and use those adjusted sale prices to estimate the value of the subject property.

3. The cost approach: This method involves estimating the cost to rebuild the property from scratch and then subtracting any depreciation. This approach is less commonly used for multifamily properties, as it is typically more applicable to properties with a shorter remaining economic life.

Income vs comparison approach when determining value:

The income approach and the comparison approach are two common methods used to determine the value of real estate.

The income approach is based on the idea that the value of a property is equal to the present value of the expected future cash flows it will generate. This approach is commonly used to value income-producing properties, such as rental properties or commercial properties. To determine the value of a property using the income approach, an appraiser will estimate the property's potential income and expenses, and then discount that cash flow stream to its present value using a discount rate.

The comparison approach, also known as the market approach, involves comparing the subject property to similar properties that have recently sold in the same market. This approach is based on the principle of substitution, which states that a buyer will not pay more for a property than the cost of acquiring a similar property. To value a property using the comparison approach, an appraiser will identify comparable properties, or "comps," that have recently sold in the same market and are similar in size, location, and other relevant characteristics. The appraiser will then adjust the sale prices of the comps to account for any differences between them and the subject property, and use those adjusted sale prices to estimate the value of the subject property.

Both the income approach and the comparison approach have their own strengths and limitations, and appraisers may use one or both approaches depending on the type of property being valued and the availability of data.