Appraising Income-Producing Properties. Rents Tell the Story

Published by Jason Ferris on

Appraising Income-Producing Properties. Rents Tell The Story

Appraising Income Producing Properties

I started appraising in 2003, like a lot of appraisers. This was the boom time for mortgage lending which eventually led up to the 2007-2008 crash and subsequent 5-year recession. One thing I learned is to cross-check yourself and your thinking. When we appraise income-producing properties, you can generally look to rents to tell you the story.

An example of using Rents for appraising income-producing properties is a recent appraisal we did in Eastpoint Louisville, KY.  If I’m appraising an office building in Eastpoint and my rents are $20.00 per square foot, that should tell me that the value should be a factor of rents. So, if I compare a building in Plainview that sold for $120 per square foot and had rents of $18.00 per square foot to my building, all other things being equal, I should adjust the Plainview building upwards by 11% because I’m looking to my rents to tell me the story. So, the difficult part is to try to figure out why the Plainview building is renting for $2.00 less per square foot. Is it age since older buildings generally rent for less than newer buildings? Is it parking because there are too few spots and employees can’t find parking spaces? Is it location because this area is not as popular as Eastpoint?  Is it because it sold 3 years ago and rents have just escalated that much over time? 

I have found that sometimes the answers are crystal clear and work out easily mathematically. However, other times the broker tells you that the seller’s company was going out of business and they needed to unload the property quickly, which led to a discounted asking price.  Those are the situations we deal with every day as commercial appraisers when appraising income-producing properties

If you have an income-producing property such as an office, a retail shopping center, or an apartment building, give us a call to appraise it for you. We’ve been working in Louisville and southern Indiana for 45 years.