Apartment Property Value Calculation

The sales comparison approach uses data on recent transactions of similar apartments in the vicinity of the apartment under consideration or at least in the same local market.

Since no two apartment units and locations are exactly the same, the valuer needs to adjust the sales prices of the apartment units that are used as comparables (comps)accordingly so as to reflect their differences from the apartment unit under consideration. For example, if a comparable has higher quality finishings than the apartment that is valued, then the valuer needs to reduce accordingly the sales price of the comparable apartment by the amount that reflects its quality differential, based on his knowledge of the local market at the time of valuation.

The discounted cash flow methodology is more appropriate to use for apartment property value calculation from an investment point of view, especially in the case of rental property. With this approach the value of an apartment unit is calculated as the Present Value (PV) of the expected after-tax cash flows over the investor's holding period. In this approach we need to use the formula:

PV = CF₁/(1+r)+CF₂/(1+r)²+....+CF_n/(1+r)ⁿ

whereCF₁ = the afer-tax annal cash flow in the first year of the holding period
CF_n = afer-tax cash flow in the last year n of the holding period
r = the rate of return that would be required by an average investort to invest in an apartment of the quality, location and risk profile that characterize the apartment under consideration

The annual cash flows, take into account all revenues (which in the case of rental apartments is mostly the income received from rents) and expenses associated with the ownership of the apartment unit.

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