Income Appraoch - SFR

[Chris Smith]

Hello all. I have a subject that is owner occupied. The tenant occupancy
is approximately 43%. The neighborhood is 1 square mile. Rental data
is readily available. What I'm asking is although the subject is not being
rented, with the rental data being as available as it is, shouldn't I
utilize the Income Approach to value? This is really the first time I have
had an assignment that ever brought this to question. Thank you for any
replies you may have. Tommy Smith - Oklahoma

 

[KD247]

The Income Approach assumes a correlation between future cash flow and value. However, appraisers sometimes estimate future cash flow based only on current rental income. When buyers evaluate income property, they may strongly consider other factors, including: future maintenance, rental projections, and potential appreciation of the property.

In my area, some of the most desirable income properties have returns of only 3.5% annually, while other properties with returns of 9-10% may linger on the market for months. The wide range is mainly attributable to differences in perceived potential appreciation.

With 43% non-owner occupied properties, the motivation of investors should be considered in the appraisal. In some neighborhoods, brokers and buyers will consistently speak in terms of rent multipliers. But, there are other neighborhoods where brokers and buyers will tell you that investors are more concerned with the amount of maintenance required or the likelihood that the property will go up in value. If buyers don't use rent multipliers as their primary criterion for determining value, then an appraiser probably shouldn't either.

Thanks for the interesting question. I'll look forward to reading the viewpoints of other appraisers.

 

[Larry Lyke]

Tommy --

I would say yes and no. [I assume this is a refi.]

Yes, if you want to and because rental data is so readily available.

No, if you don't want to highlight the rental aspects of the neighborhood other than putting it in the Neighborhood section checkbox. With an O-O (owner-occpuant), the interest rates are different and you may hinder the LO's ability to obtain a low rate.

Just something to think about. Good luck.

 

[Rick Neighbors]

Chris,

Don't we always "consider" all three approaches to value? Assuming you are doing a complete appraisal. If the neighborhood is chock full of rental properties, then it is definitly applicable. Who is your client anyway? I don't think I would worry about the financing, just report the truth and let the parties involved make their decisions. That's why they hired you.

 

[Chris Smith]

Thanks for the replies, all. Sorry for this late reply. If after some additional
research, I find an insufficient # of rental sales I will not use the Income Approach and comment on the reasons for not doing so. If I do have the sales, I think it would be appropriate.
Tommy Smith - Oklahoma