Why Valuation Matters

Accurate valuation underpins pricing, risk control and deal selection. Investors use it to screen opportunities, align financing and set exit targets. A clear view of value also prevents overpaying in hot markets and helps compare assets across neighborhoods and property types.

Sales Comparison Approach

This method benchmarks a subject property against recent comparable sales. Adjustments account for size, age, condition, location and special features. It works best where data is abundant and properties are similar-typical for houses, townhomes and small multifamily. The result is a supported range rather than a single number. Need help with appraisal for new construction? Visit us for expert assistance!

Income Capitalization Approach

For income assets, value equals the property’s stabilized net operating income divided by a market capitalization rate. The cap rate reflects required return, growth expectations and asset risk. Focus on normalizing income, removing one-offs and setting realistic vacancy and expense ratios. Small shifts in cap rate can move value significantly.

Gross Rent Multiplier

GRM offers a quick screen: purchase price divided by annual gross rent. It ignores expenses and capex, so it is not a standalone valuation. Use it to compare similar units in the same submarket, then deepen analysis with NOI and cap rates. Lower GRMs indicate better value.

Cost Approach

Here, value equals land value plus current replacement cost of improvements, minus depreciation. It is useful for new builds, special-purpose properties or thin sales markets. Estimating physical, functional and external obsolescence is the challenge. Pair this method with market checks to avoid overstating replacement cost advantages.

Discounted Cash Flow

DCF projects multi-year cash flows and a terminal sale, discounting them at a required return. It captures renovations, lease-up, rent growth and exit cap assumptions. Because outputs are only as good as inputs, run sensitivities on rents, expenses, discount rate and exit cap. Review results against simpler methods for reasonableness.

Choosing and Combining Methods

No single approach fits every case. Select based on property type, data quality and investment plan. For a duplex, sales comparison plus income metrics may suffice. For a shopping center, DCF with market cap checks is stronger. Triangulate methods and weight the most reliable evidence to reach a defensible view. Document assumptions so partners, lenders and appraisers can follow reasoning and evidence later.

Author Resource:

Rick Lopez writes about capital gains, home and property appraisals with extensive expertise. You can find more thoughts at experience appraisers blog.