How I calculate a future value of a rental property

Question

The question is how I calculate the ARV of a property to put into the analyzer at to do the final calculation.  The analyzer ask for purchase price, After Repair Value ( ? ) and cost of repairs.

Questions:

• ARV of the property using the Income the property generates
• Do I have to add the cost of repair to the cost of purchase into the analyzer to get an accurate interest monthly cost .
• Does the analyzer takes in consideration the cost of purchase and the cost of repair minus the down payment to calculate the interest monthly cost.
• The analyzer gives you an ARV at the end but it also ask for an ARV in the middle of the form . Which one you use ?
• The higher the cap rate the lower the value of the property is when I revers the equation.

I need some help or clarity on these question.. Please help.

Thanks.

Greg Scully · Answer

@Andy Fernandez - Your ARV would be your future stabilized NOI/cap rate.

Take your gross potential income (8400*12)

- vacancy and concessions

+ other income

= Total Net income

Determine your expenses: leave out debt service and cap ex reserves

Total net income - expenses = NOI

NOI/CAP rate = ARV

I don't use the BP calculator, so I can't address those questions.

Andy Fernandez · Answer

Thank you Theo, that is very inciteful.

Thanks.

Theo Hicks · Answer

The future value is based on the future NOI and future cap rate. If you are underwriting 5+ year projections, you should have the NOI. People have different methods for calculate a future cap rate. The best I've seen is adding 10 bps (0.1% each year) to the in-place cap rate. For example, if you want to know the future value in 5 years and you buy at a 5% cap, assume a 5.5% cap rate.

Andy Fernandez · Answer

Greg thank you for your detail information, this is exactly what I was looking for.

Thank you.

Andy Fernandez · Answer

Thank you Immanuel, this is exactly what I was looking for. I really appreciated you taking the time  in providing this valuable help.

Thanks

Immanuel Sibero · Answer

@Andy Fernandez

With a 6 unit complex, the income approach is normally used to value the property. @Greg Scully has given you the formula which is NOI / cap rate = ARV. You indicated that you already have the prevailing market cap rate for the area (i.e. 6.49%). Once you determine your NOI (per Greg's directions), you should then be able to compute your estimated ARV.

I don't use the BP calculator but I know it would not help you much in your case. You're trying to solve for value, the calculator solves for cap rate (i.e. backwards from what you need). This is why I recommend building your own analysis.

Cheers... Immanuel

Andy Fernandez · Answer

Thank you Immanuel, I am looking at a 6 unit complex. What I am trying to determent is the value of the  property. The units will produce 8400 per month . The acquisition price  is 275k plus a 185K rehab.

My goal is to determent the value or ARV using the income method for this property. I understand that the neighborhood, condition, and area rental are also part of this valuation.

Any suggestion will be highly appreciated.

Thanks.

Immanuel Sibero · Answer

@Andy Fernandez

Are you referring to the BP analyzer? If so, that analyzer is not sophisticated enough for you. For what you're trying to do, why not build your own analyzer? You would have total control over it and know exactly which part does what so no more guessing or wondering.

Seems like you're focusing too much on cap rate. You should focus on value. Value drives cap rate, not the other way around. So what type of multi unit are you planning to build? Cap rate becomes more of a factor in properties with 5 or more units.

Cheers... Immanuel

Andy Fernandez · Answer

Thank you Greg. I am looking in converting a single family home into a multi unit per zoning code.

I am following the cap rate in the area of 6.49 but when I ran the numbers I 2as getting a 18.5 cap rate. This will give me a lower value on the property than if I use a 6.49 cap rate.

What will be the case or the best way to proceed.

Thanks

Greg Dickerson · Answer

If you are talking about SFR, Duplex, Triplex and Quads  it’s all about comps. Just look for comparable properties that have recently sold.

Multi family and commercial is all about NOI and market CAP rates.

I’m either case you can ask realtors and brokers for comps especially if you are working with them to help you find and evaluate properties.

How I calculate a future value of a rental property

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