Multi-Family (5+) Valuation

7 Replies

So it is my understanding that multi-family properties that feature more than 4 units are appraised based on their NOI and Cap rate. I understand the math behind that, so no need to dig there.

My two questions are:

1. How to you determine the cap rate when the market value is the number you are trying to calculate (ie an unknown)? Is it just based on the contract price at time of sale, thereby permanently locking in the rolling market value cap rate of the property, or is it based on the cap rate of similar properties in the same market?

2. Does this valuation principle apply to all apartment buildings with 5 or more units, provided that all units are legal?

@Christopher Freeman Since cap rate represents a risk premium it fluctuates by market, property type and class, demand, etc. Commercial mortgage brokers handling transactions in the area can give you an idea of the cap rates they are using to underwrite similar properties in the market.
@Christopher Freeman Yes, a market or an area has a cap rate. This is property class specific. As a general rule the more risk the higher the cap rate but you’ll dig in and learn more. There is a good BP article on the math behind the valuation. Complicated before you learn it and simple after!

 Thank you for this information, it’s very helpful. I do have a question, how do I find the market valuation on a property I want to offer less on so the market valuation equals that lesser price? Which I believe reflect a more accurate market valuation. 

Thank you in advance for your help I look forward to hearing from you. 

Ray Dryjanski