What is "Appreciation" in Multifam Properties and How Is It Actually Measured/Determined by the Lender?
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[{"id": "fcivx01", "text": "The building appreciates because the rents go up yes. \n\nCondition of the building matters a little of course. But in the end, the value of an apartment building is based prettt strictly on the income it brings in, for most cases.\n\nOf course the landlord can raise rents yearly, but only as much as the market will bear.", "replies": [], "depth": 1}, {"id": "fcix2ug", "text": "There are two main aspects in the price of any commercial property. NOI and Cap rates. Increase the NOI and your property is worth more. Conversely, if cap rates go down over your hold period, the property will also be worth more.", "replies": [{"id": "fcizoik", "text": "And if rents go up and cap rates go down every dollar rent raised is worth more! It's such a great system! Oh how I love commercial real estate.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fcj3xjz", "text": "Rents go up due to inflation and demand increases. Appreciation occurs as rents increase, or cap rates decrease. As NOI increases, the value of the property increase because the rents are generating more cash flow.\n\nAt the basis of all things real estate, is cash flow. How do I have to invest, and what cash does the property generate.\n\nThe lender may do some assessment of the property, but you as the owner should always know where your property stands valuation wise. A quick check in with a competent CRE broker can give you cap rates so you can calculate a value.", "replies": [{"id": "fcje6qg", "text": "Interesting, but the Landlord can control the Rent, but who controls the cap rate? For example, if I buy a property with an 11% cap rate, that rate will never go down, only up. So if cap rate is something I (the landlord of that property) cant control, why even buy that property?", "replies": [{"id": "fcjhcwb", "text": "Market controls cap rates. Things that influence cap rates are: How in demand is your property or asset class? What is the perceived risk of the asset class? Asset location? How good is your marketing? If investors want the property, cap rates will go down as the price is pushed up, and cap rates will go up if the property is less desirable. Think of it as a risk measurement tool.\n\nCap rates certainly can go down. Depends on the market. You want your cap rate to go down as that, generally, means your property is appreciating in value. 10% cap rate is better than an 11%, if you bought at 11%.\n\nAs the landlord, you don\u2019t control cap rates, generally, but you shouldn\u2019t be focused on cap rates. Your returns are measured in yield on costs, cash on cash, IRR/XIRR, and your belief in that property\u2019s ability to generate you a sufficient return over your hold period. Your cash investment measured against the NOI of the property. Depends also how you financed the property - with equity or debt.\n\nThere are nuances to all of this that I didn\u2019t get into, but in general this is how it works.", "replies": [], "depth": 3}, {"id": "fcqz7x0", "text": "Just to chime in on cap rates - this is just your ratio expressed in a percentage form. I would think of it this way - NOI divided by market asset value. This means that you actually want the percentage to be lower because that means your property value has gone up.  \n\nCap rates are also a bit skewed because they are more of a representation of the property\u2019s performance on an annual basis, so it will not account for any downturns in the property history. This is more of a way to quickly compare properties in the market against each other to get an idea of how the overall market is performing.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fcjvq2q", "text": "The lender will always order an appraisal to dictate value. If you think your property has appreciated, upon your next refinance they\u2019ll get another appraisal which will say if yes or no and by how much.", "replies": [], "depth": 1}, {"id": "fck0ctw", "text": "Appreciate is growth and lenders don\u2019t under write to growth. Even value add properties that aren\u2019t stabilized, a lender would get an as-is /as-completed value", "replies": [], "depth": 1}]