Cap Rates?

[Kyle Waites]

In determining the market value with the Income Appraoch how is it best to determine the Cap rate to use? I understand the formula I/RV and also the metod to derive the cap rate when the mortage info is known. Without information on similar properties and their income/expense data I am not sure just which is the correct way to determine this value. Thanks for your input.

 

[Michigan CG]

Moved to the Commercial/Industrial section where it is more appropriate than Ask an Appraiser section which is moderated.

 

[Abester]

If there are no sales of property that were subject to lease and from which th rates can be derived, perhaps the subject is best valued from the perspective of an owner-user rather than an owner-investor.

 

[Mountain Man]

You can use investor surveys like Kiplinger in the AI mag... but you'd better have some additional support. So when verifying sales comparables, if I can't get good income data from the agent or owner, I run the income approach using market rent rates to develop a cap rate. Then with multiple sources, and looking at the expenses and EGI per SqFt range, I know my income approach is reasonable. Basically, you just look at the sales comp like a typical investor would.

 

[Abester]

Forcing an income approach to work by using non-comparable data is no more reliable than forcing a cost approach to work. If the subject property would be purchased by an owner-investor, there are comparable market data from which rates can be derived. Don't put all your apples into the band of investment unless you have a market derived equity rates. Reviewers love to see support to equity rates...

 

[Mountain Man]

You must have missed the multiple sources part of my post... I have my support, and it's not forcing a cap rate. Once you do so many, you have good inside data. Getting to that point is the hard part.

 

[Abester]

M.

I'm not coming at you... I'm making a distinction to which the OPer has not replied. If the subject is best valued as an income producing property, it is because there is demand for it as such. If it is part of a pool of like properties from which an investor would weigh the choice to purchase, there WILL be sale data from which actual (not constructed) overall rates can be extracted. If there are no sale properties that have I & E data, the property probably is better suited for an analysis from a pure sales comparison approach. Assuming the appraiser does all "three approaches," the reconciliation would be / should be geared toward the expectations of a typical market participant. If the typical market participant would use the sales comparison approach, the cost and income approach completion(s) is/are academic since they would be given no weight in the final reconciliation.

 

[LuckyLucy48]

If you have a well researched and documented market rent for your subject, then you should be able to reliably estimate market rent and expenses for your comparable sales in order to develop a cap rate.
I review a fair amount of other appraisers commercial work......be careful with the Band of Investment. If you are going to use it, make sure your EDR's are well discussed and documented......and compare typical loan terms in the market with the actual loan terms for your property.
T

 

[Abester]

then you should be able to reliably estimate market rent and expenses for your comparable sales in order to develop a cap rate.

This is an implied rate and not reflective of the income and expense expectations of the parties to the sale since there was no apparent income involved...

 

[Mountain Man]

That's true too Abester. It's been rare, and has always been in rural/remote areas when absolutely no income data is available. In the few cases I've seen, rent rates would be so low that it would blow through cash faster than my wife at a Labor Day sale. In a metro area, you should be able to find good data. If not, then there is something messed up in the local market.