An Estimate of Value

An Estimate of Value :  Income Approach Example

 If there were  three comparable commercial properties and an investor was trying to estimate the value

of the subject property using a simplified method of the income approach and selection of the appropriate capitalization rate.

The subject property is a 18 unit multi-tenanted building with a net operating income of $75,850.

 Given the following information;

The three comparables; 

   Sale      Sale Price      |     Net Operating Income

A.       $ 987,785             $ 79,985                        

      B.         $ 850,250              $ 68,775                        

      C.         $ 925,750              $ 74,950

What would the estimated value of the subject property be when using a select capitalization rate

based upon these recent sales comparable commercial properties?

Take a moment to do a few calculations before looking at the answer developed below.

[    Take 5 minutes and run your numbers …  ]

Using the three commercial comparables above, first determine the capitalization rate associated with each.

After the above step, look at the three capitalization rates and select the one that best represents the average market capitalization rate and the most recent sale (time factor) for the subject property, understand it’s location, age, quality of income, time on the market, etc… the economy is on a positive slight uptrend and there is low inventory of this type of commercial property (supply issues, while demand is relatively constant).

Credit and liquidity in the market place is tight with more lenders and investors taking longer to make investment decisions and commitments.

Sale      Sale Price   |  Net Operating Income  |           Capitalization Rate : 

                                                                             [NOI/Sale Price] (rounded to 2 decimal places) 

      A.      $ 987,785             $ 79,985                        8.10%

B.    $ 850,250             $ 68,775                         8.09%

   C. $ 925,750             $ 74,950                         8.10%

It may be appropriate to select a 8.10 % capitalization rate to determine an estimate of value for the subject commercial property, having been developed from the most comparable properties sold recently in time. 

Given an NOI of $75,850 for the subject property and using an 8.10 % capitalization rate we arrive at an estimate of value of …

Estimate of Value :    $ 936,419.75  =     $75,850 (NOI)   /   8.10% (Cap Rate)

Therefore the estimate of value for the subject commercial property is $936,420 (rounded).

All real estate transactions are unique.

The above was meant to initiate discussion, educational purposes and not provide tax,

legal, financial, engineering, environmental advice, the appropriate expert in each area

should be consulted before meaning action is taken with an investor’s assets.

Consider reaching out to us at Envoy Capitol Realty Inc., Brokerage to start

a discussion about your real estate needs and wants.

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