Apartment Investment

Jan 4, 2024 | Uncategorized

Many ag folks are looking for “passive income streams.” Whether residential rental properties are passive or not, I’ll leave that up to your opinion.

A friend’s family member is selling their 6-plex and asked if I’d do a quick back-of-the-envelope valuation to see what they should list it for.

There’s generally three methods of valuation:

  1. Comparable Sales: where you research what similar properties sold for.
  2. Replacement Value: where you calculate what it would cost to replace the property, and discount it for age & condition.
  3. Income Capitalization Approach: where you determine future profit potential and apply a prevailing capitalization rate.

I used the third method, and the key to placing a value on income-producing rental real estate is finding Net Operating Income (NOI) and then dividing that by comparable Capitalization Rates.

As you can see, the big variables in determining the value are the Operating Expense Ratio and the Cap Rate used.

You can download a copy of this spreadsheet in the Resources Library.

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