What is the property worth?

If you are looking for a pair of shoes, how much are you willing to spend on them?

When you are looking at a multifamily property, how do you price it?  

Let’s say a broker gets in touch with you with an apartment complex that is for sale.  I just saw a listing this morning for one near me.  Maybe you know an owner who wants to sell.  How do you or I determine the value of that property?

Let’s take a look at the following ways of coming up with a number.


Someone showed me a pair of basketball shoes the other day.  They asked, “How much would you pay for these?”  They looked worn to me, like what you might get at Goodwill.  I put a price of $20.  If one paid retail at the shoe store, they might sell for maybe $100 or $150.

That pair of shoes sold for $1.472 million at an auction this past summer.  

They belonged to Michael Jordan.  Someone thought they were worth that much.

Value really is subjective, isn’t it?  Each individual assigns a certain value to things.

I remember being in an apartment investor meetup group about a year ago.  The leader described a multi-family property to us – the location, the number of apartments, the current rents, etc.  We divided into five groups with the assignment of determining an offer price for that property.  

Each of the groups huddled up, did some calculations, agreed on an answer and reported an offer price.  

The offer prices were all over the place.  Each group gave the property a different value.

Some made math errors in their calculations.  That can happen, can’t it?

Some made assumptions.  Assumptions have an impact, don’t they?

What the exercise taught me is how “subjective” valuing an investment property can be.  Underwriting a property has a subjective element to it.

Be aware of this subjective nature of assigning value, even as you use one of the following seemingly more objective approaches.

And, be aware of your biases, some of which are sub-conscious, that might impact how you approach assigning value to a multi-family property.


In the retail, single-family world, investors usually look at comparable properties to determine the after-repair-value (ARV) of a home.

We look for recent sales that are of about the same size, in the same neighborhood, sold within a certain period of time, with approximately the same amenities or features.  We look for the best three or four comparable properties, make a few adjustments and average out a price.

This is something like what a property appraiser will do.  Find recent sales.  Drive by those properties, take pictures, note the characteristics of each, and do some computation to determine a value.

In essence, this is a way of letting the “market” tell us what the value is currently.  In other words, what are people paying for properties like this one?

We can do this with multi-family properties as well and get some idea of what the value might be.  

I talked with a broker this morning who told me about 34 apartment complexes, each having over 100 doors, that had sold in the past 12 months in a certain geographical area.  He was doing comps, wasn’t he?

Although we don’t admit it, those of us in the multi-family space do use comparables, to a great degree. They tell us what the market is paying for properties. Take a look at some of the unique ways we value our properties.


Now, those of us in the multi-family space realize that commercial properties like apartment complexes are said to be valued as a business, not just as a piece of property. 

In other words, the value for an apartment complex is not so much determined by its size or location or amenities but rather on what is called Net Operating Income (NOI). Operating apartments is a business.

Commercial properties, which include apartment properties with 5 or more doors, are valued for the amount of revenue they produce.  Most investors are not planning on living in the complex.  They are thinking about the amount of money the complex is producing over and above the expenses of operating the complex.  

They are “following the money”.  They are going to invest a certain amount of money and they want to make money on their investment.  They are interested in the return they can get for their investment.

For example:  If you have $1,000 how much would you earn if you put it in the bank?  How much might you earn if you invested it in a mutual fund?  How much would that investment get you if you bought some cryptocurrency?  What would your return be if you bought and operated a business, say a restaurant or a car wash, or an apartment complex?

So to determine the return or the profit, or the net operating income, apartment investors look at how much revenue is produced by the property.  They then subtract from that how much the total expenses were for the property for the past 12 months it has been operating.

Income minus Expenses equals Net Operating Income.  I – E = NOI

In the commercial investment space, we do not include the financing costs, or mortgage payments, when determining NOI.  We do this so we can see what the property would make if we paid cash for it and had no financing costs.  This way we can compare properties that might have very different financing costs for the current owners.  Make sense?

For example:   one property may have an annual mortgage expense of $500,000 and another property, because it is not highly leveraged, may only have an annual financing cost of $100,000.  So we don’t count the financing costs when determining the net operating expenses.

They are important when calculating cash flow, but not when determining the value, as this approach is normally executed.  

We will then use something call the CAP RATE 


The cap rate, or capitalization rate, is the ratio of a property’s net income to its purchase price. It is a key number for gauging a property’s rental income potential.  Very simply the Cap Rate is the annual return on your investment, excluding financing costs.  

A Cap Rate of 6% would, theoretically, produce a 6% return and a Cap Rate of 10% would produce a 10% return.  

The cap rate is a math computation.  Take the annual net operating income divided by the value of the property.  

Cap Rate = Net Operating Income / Value

So, in the magic of mathematics, we can move the numbers around in the formula and compute the value of the property if we know the other two variables.  The value is the net operating income divided by the cap rate.

Value = Net Operating Income / Cap Rate

So if you know the Net Operating Income of a property, by taking a look at the last 12 months from the income and expense report on the property, and if you know the Cap Rate, you can use math to determine the value of the property.

But, here is the question.  What is the Cap Rate?

Good question.  It is determined by the comparable sales of properties over a period of time in that market. What have other investors have been willing to pay for properties of a similar size and quality?

Even though it is a mathematical formula, it is still quite subjective.

Ask a broker who knows the market what she thinks the cap rate is for the kind of property you are seeking to value.  This could be a 100 to 150 unit, Class C property in a certain geographic location.  But, realize there are a lot of variables and subjective elements working in each of the buyers of those properties.


Another way investors value property is with a pro-forma.  A pro-forma is a forward-looking analysis of the business.  Instead of taking the past 12 months’ operating income and expenses, one looks at what the property might produce at a point in the future.

For example, two years from now, if we purchase this property and complete certain improvements on the property, and also implement our property and asset management systems, what would the value be then?  

We might have an idea of the impact our approach would have on the value.  Could the rents be raised? What if we made certain improvements?  

If we implement our ideas, we might think the property should be able to produce a certain amount of income with a certain level of expenses, thus providing an expected net operating income.  

To produce a pro-forma NOI one must make a lot of assumptions.

Many investors don’t value properties based on pro-forma, but almost all investors compute their forward-looking projections based on the potential income the property can produce when they own it.  Do you do the same?

We may not choose to pay the price that would be computed from that pro-forma NOI based on the current Cap Rates. But it does figure into our valuation of the property or our desire to own the property and employ our systems on it.

Let’s look at one more quick way to determine the value of a property. 


The broker I spoke to yesterday said, based on the 34 properties with 100 plus doors that sold in this particular geographic market area which were C+ properties, the average “price per door” was…

It is again a matter of solving a simple math problem.  Divide the purchase price by the number of doors (the number of apartments).  

Now, one has to take into consideration the quality of the property of course.  It might be good to note the average size of the apartments and some other factors.  But, this “price per door” is an appropriate tool for making a quick determination of the value of a multi-family property.


How do you or I determine the value of a property we might be interested in buying?

First, we would be wise to realize that whatever mathematical formula we use, there is a measure of subjectivity in our assumptions and calculations.  Value is a numbers game.  But emotions and thoughts enter into our use of the numbers.  Admit this.

Second, whatever approach we use, it is helpful to determine what other investors are paying for comparable properties.  We may think the property is worth less or more than what others are paying, but using the Cap Rate or the Price per Door will put us in the ballpark for the market value of the property.

Third, we can decide if we will base our value totally on how it is operating with the current owner or how we would operate it in the future.  Most investors would probably choose to value it based on the current operations.  However, the future pro-forma considerations and assumptions do enter in, don’t they?


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