Owners of apartment buildings often hear a value for their property without hearing how anyone arrived at it. This article explains the methods buyers, brokers and appraisers use to value multifamily property in Anchorage, so you can read any number you are given with a critical eye.
The income approach
Multifamily buildings are bought for their income, so the main method is the income approach. The question it answers is simple: what is this stream of net income worth to a buyer?
The starting point is net operating income, or NOI. NOI is the income the property collects minus the cost of operating it. It does not include mortgage payments, depreciation, or the owner's income taxes, because those depend on the owner and not on the building.
- Gross potential rent: what every unit would bring at current rents if fully occupied
- Less vacancy and credit loss: units that sit empty and rent that is not collected
- Plus other income: laundry, parking, storage, pet fees and similar items
- Less operating expenses: taxes, insurance, utilities, heat, repairs, snow removal, management and reserves
Cap rate, explained
The capitalization rate, or cap rate, links NOI to value. It is the NOI divided by the price. Turned around, value equals NOI divided by the cap rate.
A cap rate reflects how much return buyers want for the risk they take on. A building with stable tenants, good condition and a strong location usually trades at a lower cap rate, which means a higher price for the same income. A building with more risk trades at a higher cap rate. Interest rates, the age of the building, and the depth of the buyer pool all move it.
We are not giving Anchorage cap rates here. They change with the market and vary by property, and a figure without a current source behind it can mislead. A good valuation should show which sales and assumptions support the rate it uses.
Example only, not a market figure
A hypothetical building collects $200,000 a year in income after vacancy and has $80,000 in operating expenses. Its NOI is $120,000. At a 6% cap rate, the implied value is $120,000 divided by 0.06, or $2,000,000. At 7%, it is about $1,714,000. A one point change in the rate moves the value by close to $300,000, which is why the rate assumption deserves scrutiny.
Cross-checks: price per unit and per square foot
Price per unit and price per square foot are quick ways to compare a building to others that have sold. They are useful for spotting a number that is far out of line. They are weaker as a primary method because they ignore differences in rent, expenses and condition. Two buildings with the same unit count can have very different incomes.
Comparable sales
Recent sales of similar buildings show what buyers have actually paid. The best comparables are close in location, size, age, unit mix and condition, and sold recently. Adjustments are made for the differences. In a market the size of Anchorage, there may only be a handful of good comparables in a given period, so judgment and local knowledge matter.
Expense reality in Anchorage
Expenses are where many valuations go wrong. Seller statements sometimes leave out items that a buyer will have to pay, and buyers will rebuild the expenses themselves. In Anchorage, pay attention to:
- Heat and utilities. Who pays for heat, water, sewer and trash makes a large difference.
- Snow removal. Plowing, sanding and roof snow can add up across a winter.
- Vacancy. Use a realistic figure, even if the building is full today.
- Reserves. Money set aside each year for roofs, boilers, flooring and other replacements.
- Management. Even if you manage the building yourself, a buyer will budget for professional management.
An NOI that leaves these out will look higher than what a buyer will underwrite, and the gap usually shows up during negotiation or due diligence.
In-place income versus value-add upside
Buyers pay for income that exists today. If rents are below market or units need renovation, there may be upside, but a buyer will discount it because they take on the cost, time and risk of getting there. Owners sometimes expect to be paid for the full future potential. In practice, most of the price is based on in-place income, with some credit for upside that is well documented and realistic.
Broker opinion of value versus an appraisal
A broker opinion of value is an estimate prepared by a broker to help an owner decide whether and how to sell. It reflects the broker's read of the market and likely buyers. An appraisal is a formal valuation by a licensed appraiser, usually ordered by a lender, that follows set standards. Both are useful for different purposes. A broker opinion is a planning tool, and an appraisal is often required for financing.
What to prepare for a valuation
- A current rent roll with lease dates and deposits
- A trailing twelve month operating statement and the prior year if available
- Tax, insurance and utility bills
- A list of major repairs and replacements with dates
- Notes on any known issues or planned work
The more complete the information, the more reliable the estimate. For the selling side of the process, see Selling a commercial building in Anchorage: what owners should know before listing.
Get a free valuation
The Keyport Group owns and operates multifamily and commercial property, and we also broker it, so we value buildings using the same costs we pay on our own. If you own a property with two or more units or a commercial building in Anchorage, request a free valuation below. There is no obligation to list.
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This article is general information, not legal, tax or investment advice.