Question

ABC Residential Investors, LLP, is considering the purchase of a 120-unit apartment complex in Steel City, Pennsylvania. A market study of the area reveals that an average rental of $600 per month per unit could be realized in the appropriate market area. During the last six months, two very comparable apartment complexes have sold in the same market area. The Oaks, a 140-unit project, sold for $9 million. Its rental schedule indicated that the average rent per unit is $550 per month. Palms, a 90-unit complex, is presently renting units at $650 per month, and its selling price was $6.6 million. The mix of number of bedrooms and sizes of units for both complexes is very similar to that of the subject property, and both appear to have normal vacancy rates of about 10 percent annually. All rents are net as tenants pay all utilities and expenses.
Based on the data provided here, establish an estimate of value of the subject property using the Gross Rent Multiplier (GRM)?

What other information would be desirable in reaching a conclusion about the probable value for the property?

Answer 1

Answer:

The estimate value of the subject property is $8,269,200

The other information that would be desirable in reaching a conclusion:

The closeness of the property to central business districts as the closer it is the higher the asking price.

The estimate was solely based on revenue, the applicable costs have been ignored.

The average taken might not be a good indication for the subject property because the property might have unique features

Explanation:

The formula for Gross Rent Multiplier is given  Property Price / Gross Monthly Rental Income.

In determining the estimate value of the subject property ,we calculate the gross rent multiplier of the new property,then multiply it  with the annual rental income.

In ascertaining the GRM of the new property we take the average GRM of the two similar properties in the same area.This is because the new property judging from number of units, lies in-between the other two properties.

GRM for Oaks

GRM=$9000000/($550*140)

GRM =116.88

GRM for Palms

GRM=$6,600,000/($650*90)

GRM =112.82

The average GRM=(116.88+112.82)/2

                               =114.85

Subject property price=114.85*(120*$600)

                                     =$8,269,200