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There are three ways to determine the value of an apartment building:

Replacement Cost Approach
Sales Comparison Approach
Income Approach

Replacement Cost Approach

The Replacement Cost Approach determines value by calculating how much it would cost to replace an existing structure. This approach is very time consuming to complete as you must obtain pricing for all materials (from 2×4’s to outlet covers) used in the construction of a property and then calculate replacement cost. Because of this, it is very rarely used.

Sales Comparison Approach

For single-family houses and 2 – 6 unit apartment buildings, the most common approach to determining value is the Sales Comparison Approach. This approach compares similar properties that have sold within the last six months, within a certain geographical radius from the subject property (usually no more than two miles, the closer the better) to determine value.

If you’re buying a 3-family apartment and a similar one on the next block oversold for $220,000, then your property will be valued around that area.

The Income Approach

For six units and more, you would use the Income Approac h to determine the value of the property. This means that you would determine how much income the property is generating and determine its value based on that number.

There are several formulas that investors use to determine value, though one is more prevalent than others; that is the Cap Rate.

You’ll hear people talk about the “Cap Rate.” It’s what most investors use when comparing one property to another.

The Capitalization Rate is the rate at which the Net Operating Income (the income that is left over after all the expenses are taken out) repays the purchase price on an annual basis. Sounds technical, doesn’t it? Don’t let it scare you.

Cap Rate = Net Operating Income/Value (selling price)

Business systems are the way you do things. They are the procedures that can be replicated.

For example, we recently created a telephone answering system for an office receptionist. We created a script that delineated how she is to answer the phone and what information she needs to collect. She has responses for the types of questions callers may have and to whom she should direct calls.

We were very specific about the circumstances for transferring telephone calls and circumstances for taking messages. In addition, we established the procedure for inputting the information in the business’s customer relationship management (CRM) database program.

Effective business systems can be created for all kinds of work performance that occur in your organization. As you formalize your systems, the time you spend focusing on the details of a job become invaluable; as you critically examine each step of a process, you are also determining whether certain areas need improvement. This is a key component of the process because business systems need to be reviewed and improved as the ways of doing business change.

Here are five other reasons that effective business systems provide value:

1. Systems provide consistency

With business systems, you can produce the same products and services with the same level of consistency. Once you have created your systems and written down the sequential steps, your employees can follow the proper procedures consistently. You can monitor these processes and improve when necessary.

Systems can be implemented for sales, marketing operations, employee training, etc. The people who benefit the most from having systems in place are your customers who know what to expect from your business.

2. Change is easier to accomplish

Systems make a business predictable. So when change impacts your business–which may often occur–then knowing what business systems need to be modified becomes easier. You will know the current work process and can predict how change should be handled while still maintaining your systems.

Once your systems become part of a flow chart, or are written as a set of sequential tasks and procedures to follow, they become easier to monitor. You’ll notice that tasks will be completed properly and efficiently; changes can be more quickly addressed.

3. Training new employees becomes easier

New hires can be quickly integrated into your business when there is a written set of procedures for them to follow and they know exactly what is expected from them. It becomes easier to gauge the effectiveness of an employee when you have a measurable set of guidelines to review.

4. Business systems allow staff to focus on what they do best

Any time you are trying to complete a project with a specific deadline, you will want to avoid any problems that may develop. We like to create business systems that also best match the employee talent that is available. Allowing people with specific skills, knowledge, and abilities to be responsible for those parts of the business allows for better quality of work; everyone then can focus on what they do best.

Once business systems are established and implemented, activities can be performed on “autopilot.” Repetitive activities in your business become routine, and you can focus on activities with higher payoffs.

5. Business systems create value

Effective business systems become a part of your company’s organizational infrastructure. If you are selling your business, formal procedures add value. Buyer can see that operations run smoothly and consistently; new hires can be quickly integrated.

Systems are what make businesses grow, flow, endure, and sell. This makes a business purchase more enticing and more valuable because the systems become tangible assets. Businesses that effectively follow systems find themselves winning against their competition.

Are you looking to implement systems into your real estate business? Learn more about how our dedicated RE Team mastered this process and can pass on the mechanics of success.

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3 Ways To Determine The Value Of An Apartment Building