We understand that accurate valuation of investment properties requires a thorough understanding of the property's gross income, adjusted gross income, and operating expenses. To provide our clients with an accurate valuation, we assist them in analyzing their property's potential gross income (PGI), which is the maximum income the property could generate if it were fully occupied and leased at market rates. We then adjust the PGI to calculate the effective gross income (EGI), which takes into account any vacancies, concessions, or other factors that may impact the property's rental income.
Next, we analyze the property's operating expenses, which include all the costs associated with operating and maintaining the property, such as property taxes, insurance, repairs and maintenance, property management fees, utilities, and other expenses. By using historical operating expenses, we can estimate the property's future operating expenses, which is important for calculating the property's net operating income (NOI).
The net operating income represents the income generated by the property after deducting all operating expenses. This figure is essential for determining the property's value using the capitalization rate (cap rate), which represents the expected rate of return on the investment. The cap rate is typically derived from comparable property sales, and it is adjusted based on the property's condition, location, and other factors that may impact its value.
While the income valuation approach is a reliable method for valuing investment properties, we understand that other factors may also impact the property's value. As a result, we may use additional valuation methods or adjust our calculations to account for these factors. For instance, we may conduct a comparative market analysis (CMA) to compare the property to similar properties in the market or use the cost approach to value the property based on the cost of replacing it. By considering all these factors, we can provide our clients with an accurate valuation or list price that reflects the property's true value in the market.