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Valuation Fundamentals II
- Valuing a property using ratios and multipliers
a) Three methods:
- Cap rates
- Gross income multipliers
- Net income multipliers
b) What inputs do these methods use in order to estimate the property’s value?
- Discounted Cash Flow Analysis
a) The value of any asset can be calculated as:
1
3
3 2
1 2 0
T
T
T
t
t
t
T
T T
T
r
V
r
NOI
r
V
r
NOI
r
NOI
r
NOI
r
NOI
V
=
b) In order to estimate the value of the property in this way, you need to know what four things?
2
- Estimating NOI
a) Several issues should be considered when estimating future NOI:
- Specific terms of the leases on the property
- Growth in market rents
- Operating expense growth
- Capital expenditures and leasing costs
- Estimating Reversion Values
a) We will consider four basic ways of estimating the value of the property at the end of the holding period
4
RT = r − g
- The estimated reversion value is therefore
- What is r in this formula?
- Do the cash flows always need to be a growing perpetuity in this method?
d) Estimating Reversion Values Assuming Percentage Appreciation on the Purchase Price
T VT = P 0 ( 1 + G )
5
- What is the advantage of this approach?
- What is the problem with this approach?
e) Estimating Reversion Values Assuming Percentage Appreciation off of the Property’s Market Value
- Key question: How do you know the property’s market value if you don’t know the reversion value?
- Recall that the value of the property is
