Apartment Investing: Value Indicators

Question:

Steve,

I have Fast Track to Millions. In there you talk about the five different value indicators. Which one is more common to use when comparing properties? What do sellers usually go by? Do they understand what they mean? --Gary P****, Vancouver, WA


Answer:

Gary,

No, most sellers have no idea what the value indicators are or how to calculate them. Just about anyone can figure out the $/Ft and the $/Unit, but most sellers do not know or understand the meaning of a GRM/GIM or Cap rate. That’s where the challenge comes in. A lot of sellers will price their property based on a “gut feeling” of what the market is doing. Rarely is it ever realistically supported by comparable properties unless an agent managed to earn enough credibility to list it that way. (Or the property is large enough that sellers understand the income and expenses must make enough sense to attract potential investors.) Sometimes you’ll find a property that is worth much more but because the seller is motivated, they’ll sell for less. Those are great situations to be in, and in those cases the five value indicators will usually make some kind of sense even if it’s found in substantial upside. As far as which indicators are more important—it depends. All of them are important to some degree. Properties that are closer to the city core are heavily influenced by the price per foot. Properties in outlying premium markets tend to lean toward cap rates or price per unit. And properties in cash flow markets are heavily influenced by the current cash flow generated by the asset. Those are the basic, generic answers. All of them are important. It really depends on the market and the property. Thanks for the question.