Wondering what your property is worth in today’s market? Unfortunately, current conditions are not the best.
“Real estate values are declining,” says Dana Deason of Deason Financial Services in Longview, Texas, because cap rates are going up.” At the start of 2009 self storage assets were seeing an 8 to 8.5% cap rate. “In the last 30 days we’ve seen cap rates above 9%”.
Owners wanting to or needing to refinance their properties will benefit from the assistance of a mortgage broker who will push the product through in the most timely way possible as the lending environment gets more difficult every day.
Experts say you need to take a three prong approach and consider:
1) Replacement Cost
2) Current sales transactions from similar properties within your market area, and
Replacement Cost is defined as:
“The cost to build something that is substantially similar to the original but is constructed with modern materials and according to current standards, design and layout and having equal utility.” In other words: What would it take to build the facility today by today’s standards.
Current Sales Transactions
Have your competitor’s sold a property recently? If the facility is comparable in size, age, unit size/types and construction materials, this is a pretty good indicator of the price per square foot your property would bring in the market you’re in.
Of course, public records contain the details of recent sales. However, the record generally runs several months behind. Obviously, the most current information is the most valuable and can be obtained from a commercial real estate broker or other professional.
NOI (Net Operating Income) and Cap Rates
Net Operating Income is the bottom line profit resulting from income minus expenses. Annualized this number taken in relation to the current cap rate will help determine a property’s net value. It’s important to remember when calculating NOI, however, to exclude certain expenses and only consider true costs necessary for operations. Typical costs to exclude from figuring a property’s net operating income are:
- Capital improvements
- Extraordinary repairs
- Refinancing costs
- Principle and interest payments
Take it straight from Wikipedia: “In real estate investment, real property is often valued according to projected capitalization rates used as investment criteria. This is done by algebraic manipulation of the formula below:
For example, in valuing the projected sale price of an apartment building that produces an annual net cash flow of $10,000, if we set a projected capitalization rate at 7%, then the asset value (or price we would pay to own it) is $142,857.
This is often referred to as direct capitalization, and is commonly used for valuing income generating property in a real estate appraisal.
One advantage of capitalization rate valuation is that it is separate from a "market-comparables" approach to an appraisal (which compares 3 valuations: what other similar properties have sold for based on a comparison of physical, location and economic characteristics, actual replacement cost to re-build the structure in addition to the cost of the land and capitalization rates).
Given the inefficiency of real estate markets, multiple approaches are generally preferred when valuing a real estate asset.
Capitalization rates for similar properties, and particularly for "pure" income properties, are usually compared to ensure that estimated revenue is being properly valued.
