How to determine ARV?

6 Replies

For 1-4 unit properties the ARV will be determined based on comps.

For 5+ unit properties the ARV is determined by the NOI and market cap rate.

@Scott Morongell is there an exact science to determine CAP or is it more of an art? I understand the function of reducing the income by expenses but why would your 20 unit warrant a 5% CAP and mine only hold a 9%?

Thanks!

Originally posted by @Gaspare U. :

@Scott Morongell is there an exact science to determine CAP or is it more of an art? I understand the function of reducing the income by expenses but why would your 20 unit warrant a 5% CAP and mine only hold a 9%?

Thanks!

Cap rates are market are placed on markets, submarkets, asset type, and asset class. Deals with value-add plays are known to be traded even lower than a market cap rate because they can increase the value of the asset, therefore, there isn't as much emphasis on a going-in cap rate. Where this type of investor cares is what type of exit cap they are going to project on the sale (assuming they will sell it in 5-10 yrs time). Investors who are looking for completely stabilized with little to no value add left will find themselves buying deals at or sometimes above market cap rate.

If you're acquiring 1-4 units determining what other properties sold for in the area comparable to the subject property in unit quantity, size, sqft and the condition will determine the real value of your property in it's current condition.

5+ units is commercial and the value will be determined based on the NOI @Dwayne Wilson