Looking for help with property valuation
To get into valuation in CRE out of University I am trying to create a mock portfolio of properties to show to employers, as the job hunt has been tough with no experience. I am starting with a condo development and I'm unsure of how to derive a fair Property Purchase Price. For context, this building is a 400 unit, 400K sqft condo building in the heart of downtown Toronto. (I am using Argus DCF for my valuations)
[{"id": "d54lm8x", "text": "Simple cap rate calculation. Cap rate = NOI/Asset Value.\n\nTO properties trade at absurdly low cap rates, so use 3.5% if you want to be competitive and 5%+ if you want to be smart. Often the two are mutually exclusive in our fair city. Then put together a detailed budget to show income and expenses. \n\nIf you don't know how to budget for a multi unit building, proceed no further.  There is no short cut when doing decent underwriting. That said, to quickly assess value you could use rules of thumb. For example, assume a market rent per unit based on Craigslist, then assume 45% of your revenue goes to expenses in order to estimate NOI.\n\n", "replies": [{"id": "d58qw6r", "text": "^ This.\n\nLook, I don't like that your picking a condo, as must CRE firms deal with investment properties, so I'd recommend doing an apartment deal.\n\nTo determine NOI, break down the unit mix and find true comps. Identify how much they fetch per SF and and take averages of roughly 5 comps for each unit type (i.e. 1B1Ba 3B2Ba, etc.). Apply a market vacancy as well, and make sure to look at the projects that are under construction and try to form a conclusion on what that effect will be on vacancies. Think percentages here. They could be adding 500 units, but is that a big deal? It is if the market only has 2500 units, but not a big deal if the market has 50,000 units. \n\nNext operating expenses, taxes should just be a millage rate * assessed value. Then the rest include things like G&amp;A, salary, landscaping, CAM, etc. This is pretty hard to do so just taking a % of Expected gross income (Base rent - vacancy - credit loss) is your best bet. /u/TODevpr's guess of 45% is fine. I would also include CAPEX (capital expenditures, money set aside to make large improvements) @ .20/SF\n\nYou will now eventually get to **NOI**. It's time to find an appropriate cap rate to apply to this. Having resources such Real Capital Analytics, etc. is a huge help, and you may not have these, so researching a submarket cap rate (make sure to specify asset type and class of property, in this case, multifamily, likely Class A, it new, large asset) and divide NOI by the cap rate.\n\nAnd VOILA! You have determine an appropriate value!!!\n\nExample:\nBase rent: 5,000,000\n\nVacancy and Credit Loss: (250,000)\n\nExpected Gross Income: 4,750,000\n\nOPEX: (2,137,500)\n\nCAPEX @ ($0.20/SF assuming 400K SF apartment): (80,000)\n\nNOI: 2,532,500\n\nValue @ 5.5% cap --&gt; $46,045,454. \n\n", "replies": [{"id": "d58tef3", "text": "CMHC provides benchmarks for some expenses that can be used as estimations or stabilized values if you want to get a bit more detailed. But I agree, 45% is definitely a good overall estimation. ", "replies": [], "depth": 3}, {"id": "d59959v", "text": "Wow, this is incredibly helpful. Thanks everyone", "replies": [{"id": "d5a0wtx", "text": "you're welcome, network hard and study up. You'll get into the industry.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "d54ud8x", "text": "Lol did OP downvote me? ", "replies": [], "depth": 1}, {"id": "d54x1e2", "text": "Is this condo operated primarily as a rental building or are you trying value it as a bulk purchase with a discounted sellout? If you're trying to value it as a bulk purchase I would highly recommend you try doing an easier property type. If you're trying to value it as a rental building (like apartments), then estimate market rent, take out vacancy, estimate expenses and then cap the income at a market derived rate. An Argus run is pretty useless in this scenario, so if you're trying to show proficiency in it then I would do a small retail plaza or something for that. \n\nIf you're doing a bulk purchase I again recommend you try something else for your first property. For the discounted sellout you would need to estimate the retail value of a single unit, estimate an absorption rate to sellout the units, estimate holding costs like taxes, estimate commissions, marketing expenses, condo fees, etc, then discount all the cash flows back to time zero. You would also need to include profit in there as well. \n\nThe discounted sellout is a lot of work, requires a lot assumptions, requires a lot of research as you need comps for the sale price of the units, comps to estimate the absorption period, as well as figuring out the discount rate. Excel is also easier to model than Argus for a discounted sellout like this, so I wouldn't do Argus in either scenario. Again, try doing a small retail plaza if you're trying to show Argus proficiency. ", "replies": [], "depth": 1}, {"id": "d54ze2f", "text": "This is all good.. but commercial real estate is 95% who you know and whether people like you.  Do some networking, get some fresh business clothes, get a new car.", "replies": [{"id": "d58qxn6", "text": "I agree to certain extent. Building a portfolio isn't going to hurt, but 99% of people get into it without doing so.\n\nWork on the networking, dress well, make good impressions, set up lunch meetings asking for advice, buffer the resume, and you'll get something", "replies": [], "depth": 2}], "depth": 1}, {"id": "d57sq9z", "text": "As others have mentioned, start with a multifamily property if you haven't done so already. Condos can be a bit tricky depending on when/how you are selling each unit", "replies": [], "depth": 1}, {"id": "d5dbkfr", "text": "your first issue is using DCF to model a multi-family", "replies": [], "depth": 1}]