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Apartment Values

June 24, 1990

This is in response to Robert J. Bruss's "Figuring the Value of Apartment Buildings" (The Small Investor, June 3).

It is true that the "correct" gross income multiplier is difficult to determine in valuing apartments. But Bruss's explanation of the capitalization technique left out one very important step; how to get from gross annual income to net operating income.

Determining reasonable operating expenses would be extremely difficult for the novice investor. To rely on the owner's statement can be very dangerous. In 15 years of appraising, I have yet to find an expense statement from an owner or seller that was complete.

The real estate taxes usually reflect the existing taxes, not the taxes after transfer. Maintenance and repairs are often understated or reflect a large capital improvement. Management fees are usually underestimated or non-existent.

This is particularly true for buildings with fewer than 16 units (16 units or more are required by law to have a resident manager). Management can easily vary between 4% and 8% of gross income. The prudent investor would also add in a reserve expense, which rarely shows up on the owner's expense statement.

In addition, determining the appropriate capitalization rate is as difficult as determining an appropriate gross income multiplier.

When choosing the appropriate capitalization rate or gross income multiplier, many factors must be considered. These include vacancy/collection loss, age, condition, locational features, nuisances, amenities, unit type and sizes, number of units, utilities paid by owners as well as a number of other factors.

Valuing an apartment building is not difficult, but it does require time, research and experience.

KENNETH B. BERLEY

Woodland Hills

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