There are several ways to
estimate the value of an investment property. Each method has
advantages and disadvantages. All should be considered when applicable.
There are 3 key areas that would impact
the value.
- Income from the property
- Operating expenses of the property
- Financing terms
Method 1:
Gross
Multiplier –
Price
divided by Income. G=P/I.
This is a simple way of comparing
multiple investment opportunities. It does not take into account the
Operating Expenses, and Financing.
Method 2:
Price per
square foot
This
method does not take into account any of the above 3 factors.
Method 3:
Capitalization Rate –
Net
Operating Income divided by Price. R=NOI/P.
This is a common method used to value
properties. It does take into account Income and Operating Expensed.
However, Financing is not considered.
Method 4:
Cash on Cash –
Cash
flow before tax divided by Cash Invested.
This method results in a rate of return
to be used as a tool to compare investment opportunities. It takes into
account all 3 above factors. However it is not an easy way to arrive at
a value.
Method 5:
Float & Desire –
The term refers to the amount
financed & the down payment.
This is a more involved valuation method. It takes into account Income,
Operating Expenses, and Financing. Please call for my Excel
spreadsheet.
