Income properties can be evaluated by any real estate professional with simple valuation methods. One particular method of valuation is more accurate than another, depending on the type and size of the investment property you are analyzing. No matter which method you use, you must conduct a thorough rental survey of similar properties so you can see if the property you are evaluating has rental rates at market or under market. It is very important to keep many factors in mind such as location, condition, amenities, vacancy rates, and the investment marketplace which can affect the subject property's value. Otherwise, you could overvalue or even undervalue/underselling a property.
A very simple, but least accurate valuation method is the GROSS RENT MULTIPLIER method, which is mostly used on multi-family properties. You look at other recent local sales, take their selling price, divide it by the stated gross rents to arrive at a "times gross" factor, which is then multiplied by the subject property's gross rents to determine the value.
ie. Say your 20-unit property's scheduled rents are $600/mo (600x20units= $12,000x12mo/yr= $144,000 gross annual rent). Local apartments are selling for 5 times the gross annual rent (the "times gross" factor), so you value this building at $720,000 ($144,000x5). Keep in mind the other factors that can affect the value in order to see if an adjustment is needed.
A more accurate form of valuation is by using the CAPITALIZATION OF NET INCOME method. To find the property's value, you divide the property's income (NOI - ALL income minus ALL expenses, except for any debt and taxes) by the desired rate of return (Cap Rate). You should get an idea of other property's cap rate by dividing their NOI by their sales price. You still should use a current rental survey to see if the property could achieve a higher NOI. But value the property somewhere below the max value in case of a loss of scheduled rents.
There are more accurate methods such as the IRR method mostly used by institutional investors, but requires more info and you will have to do more work.
Jul 23, 2010