Pretty basic question: what is the best way to model appreciation gains in a long-term multifamily analysis if multifamily values are based on NOI and cap rate?

Is appreciation in property values simply represented in gross income growth? What if rents grow at 3% annually, but property values grow by 8% annually in an area? In that instance, if the cap rate stays the same, the calculated value will be artificially lower than the market value so how did you model or bake-in this market appreciation into say a 5 or 10 yr model?

Originally posted by @Joshua McGinnis :

Pretty basic question: what is the best way to model appreciation gains in a long-term multifamily analysis if multifamily values are based on NOI and cap rate?

Is appreciation in property values simply represented in gross income growth? What if rents grow at 3% annually, but property values grow by 8% annually in an area? In that instance, if the cap rate stays the same, the calculated value will be artificially lower than the market value so how did you model or bake-in this market appreciation into say a 5 or 10 yr model?

Number 1. All a cap rate tells you is what the market PAID for a NOI at a certain time in a certain place for a certain property type. It does not predict profitability! Some people here try to claim that it does but when challenged not one has stepped up to prove their statement.

Cap rates are based on closed sales so they will reflect the value that the market perceives of the appreciation growth. 

After a property is purchased the cap rate that that sale creates becomes a comp and is ONLY good until a better comp comes along. Cap rates are calculated using only a one year snapshot of financials so its shelf life is limited by definition. Changes in NOI or appreciation do not directly affect cap rates but can change the value.