Multifamily appraisals: how do they work?

Question

Can someone explain to me how appraisals work on 5+ plus MF units? Im looking at a 8 unit in my area that is a value add property.  Do they appraise by sq ft and compare to other properties or what? Also, if the property os in a flood zone, how much would this affect appraisals?

Cory Carlson · Answer

Considering 5+ units is asset based lending they use the income approach (cap rate is one way), comps, and replacement costs. So to "fix and flip" a 5+ unit property really should mean you're doing what's necessary to get rents up and lower expenses.

Todd Dexheimer · Answer

Appraisers will use cap rate, sales comps and replacement costs to determine value. They will take into account square footage of units, common spaces, amenities, rent rates, vacancy, expenses, etc.

To increase the value, you can renovate to raise rents, apply utility billing and other income generators or lower expense through cost savings such as LED lighting, low flow toilets, turn over costs and timing.

Josh Taylor · Answer

Im sorry guys! I should have searched more before asking this question. I knew it had some to do with cap rate, but wasn't quite sure. So basically, by doing value add and fixing up the property, your just trying to get higher rental rates, which raises income and lowers expenses like maintenance, which will raise the value of the property because of higher NOI, correct?