8 - Valuation of Income Properties - ch. 10

ucla | MGMT 170 | 2023-04-23T23:23

Table of Contents

Supplemental

Lecture

  • market value
    • price at which buyr and sller agree on at a particular time
  • appraised. vaalue
    • an stimate or. opinion onproperty value for a particular purpose for a particular date, by an appraiser
  • three methods of valuation:
    • Sales comparison
      • compares recent sales of highly comparable properties similar in location, size, age, construction quality
      • generally only method used for residential properties
      • one of three used for commercial properties
    • capitalization of income
      • gross rent multiplier (GRM)
        • annual rental income X gross rent multiplier = price (or value)
        • gross rent multiplier must bederived from the GRMs on sales of comparable properties
        • i.e. GRM = price / rental income (of comparable properties) then apply to subject property
        • simple method often used for apartment appraisal
      • capitalization of net operating income NOI
        • cap rate = NOI / Price (derived from comparable sales)
        • NOI / cap rate = price (or value)
        • capitalization (cap) raate derived from recent sales of comparable proprties - affected by market conditions
        • falling interest rates → lower cap rates and vv.
        • increase in demand relative supply → lower cap rates and vv.
      • Discounted present value (DCF) of projected future NOI
        • a 10yr cash flow model
        • dicount rate (or required internal rate of return) based on byer’s assessment of risk of achieving projected NOI and projected future sale price
        • relative to current alternative investment and capital market benchmarks
    • replacment cost
      • sum of land value + depreciated replacment cost of improvements
      • dpreeciation of building can com from physical deprciation, functional obsolescnce, and extrnal obsolescence (effects of others i.e. sewage plants nearby, train stations, etc)
      • land value is derived from comparable sales analysis of similar land plots
      • replacment cost is more reliable when improvements are relatively new
      • may be vastly different from reality due to cost of time, unknown future market conditions on both properties and cost of materials to build a property
      • i.e. find cost of a comparable land plot + cost to construct new property = price (or value)
  • land value
    • a highest and best use analysis to determine value of particular land site
    • regardless of whteher land is vacant or improved
    • particular land plot may be worth more if the existing improvements are demolished and removed

Discussion

Resources

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