Need help on calculating ARV on apt building

[Justin Johnson]

I’m having a hard time finding comps on this property to do quick ARV calculation for my discussions with a lender. https://www.loopnet.com/Listing/2415-E-Southport-Rd-Indianapolis-IN/5172314/ How would you folks recommend I calculate ARV on this? Thanks

[Jeff Copeland]

A 14-unit multifamily will not be valued based on comparable sales. It will be valued based on its cap rate, relative to other similar assets in the area. 

In admittedly oversimplified form:

• Say an identical 10-unit building a block away, where the units all rented for $1k/mo ($10k/mo or $120k/yr PGI) sold for $1M. Out of that $120k gross income, $50k was eaten up by expenses, leaving $70k NOI. Thus, that building sold for a 7% cap rate ($70k NOI / $1M acquisition cost = .07).
• Let's also assume this plays out across several properties, so we can safely utilize a market cap rate of 7%.
• Assuming your building is identical in terms of unit size, quality, location, etc - You have 14 units with market rent of $1k/mo ($168k/yr PGI). Assuming the same expense ratio as the other property (about 42%), your $168k gross produces an NOI of roughly $97,500. You would use the 7% market cap rate we already determined to sort of reverse engineer your value: $97,500 NOI / .07 market cap rate = $1.392M vauation.

I started out saying this was oversimplified, and you'll noticed I used the word "assuming" about 10 times in the above example. That's the kicker - you can't just assume this stuff for an actual valuation. The math is the same, and is relatively simple. But you need accurate income and expenses for the asset you are valuing, and several other similar assets in the market, in order for the cap rates and valuations to be accurate. 

You might find the video version of this analysis useful.

Hope that helps!