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Income Property Value - Can I Tell What my Investment is Worth?

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One of the ways a commercial appraiser will come up with value is by using the income-approach to value. This is a very simple calculation, and is often times the best number for an investor to use, as it is a direct reflection of the cash flow of the property. Understanding this process can be very helpful for mobile home park and apartment investors, as well as some other income producing properties.

Here is the formula...

Net Operating Income / Cap Rate = Value

Cap rate is short for 'capitalization rate.' It is a direct reflection of the value based on the income. This term is thrown around the real estate industry like candy. Cap rates will vary depending on the market. CA apartments will sell with a cap rate of 4.5%-6.5%. In South Carolina apartments will be selling for 8%-9.5%. Usually the cap rate rises as you move further from a large metropolitan area. For most rural areas across the country, 10%-11% isn't unheard of, especially for a mobile home park.

Commercial appraisers, depending on the appraisal format, may use these other common approaches to value.

Cost approach to value:

This is equal to the cost required to replace the subject with a subject similar in size, age, quality, and etc. within a reasonable amount of time. This approach is not usually seen as the most crucial. This is due to the fact that very rarely does a property ever need to be replaced.

Sales comparison approach to value:

This value is determined based on previous sales of similar properties. Appraisers access records of recent transactions of similar properties in the same market area. Typically the more agressive market will limit the comparable to only the most recent Once appropriate comparables have been selected, they take this data and make adjustments to value for differences in age, quality, size, etc. This approach is by far the most common used in residential lending. This approach is usually given as much weight as the income approach, as it reflects what buyers are willing to pay for similar properties in the area.

Lenders do not typically consider an increased property value for financing until a property has been owned for over one year. In the loan industry we call this 'seasoning.' If one wishes to refinance in this time, a lender will usually limit the loan amount to the amount of existing mortgages. This is referred to as a 'rate/term refinance.'

Between years one and two of ownership, it is common to have the available 'cash-out' limited to 10% of existing debt for a refinance.

E.g. Current mortgage at $500,000. Current Value $1,000,000. New mortgage of $550,000 to be put in place. This would yield $50,000 cash-out ($50,000 = 10% of current mortgage).

After two years of ownership many lenders will have no limit to the amount of cash that can be taken out of a property in a refinance transaction.


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Colby is a commercial loan officer for Business Loan Store. He worked as a residential processor specializing in mobile home financing, before becoming a multifamily investment finance specialist. Colby is very passionate about his work, and often posts several topics or directly answers investor questions in real estate forums. Colby's finance website is located at http://www.Mobile-Home-Park-Loans.com.

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