How to Determine the Value of a Duplex Rental Property

A duplex can be evaluated in the same way that investors value apartment buildings.

The rental income and expenses for both rental units should be combined to determine the Net Operating Income (NOI). Investors can then apply an appropriate cap rate to the NOI to arrive at a valuation. As is the case with any investment property, investors will need to make an estimate of the required Annual Capital Expenditures, since this figure influences the cap rate.

For tools and resources to determine the cap rate and valuation for duplex rental properties,
visit apartmentpropertyvaluation.com.

How to Calculate a Cap Rate for Real Estate without the Purchase Price Variable

How do you determine the cap rate of a property if the purchase price is unknown?

One approach is to look at cap rates from sales of comparable properties. But what if comparable sale data is unavailable? Or what if you think there is a real estate bubble, and it’s making you reluctant to rely on cap rates from recent sales?

In these instances, you can use historical risk premiums to determine what the cap rate should be using the formula shown below.

Cap Rate Formula

This infographic illustrates how to determine a cap rate when the purchase price is unknown. For more information on the subject, visit our cap rate formula page, which includes videos and a more detailed discussion.

Trying to determine the cap rate for a specific property? Use our free tool to find the cap rate and value for any apartment rental property in the United States.

Current Cap Rates for Apartments

Apartments buildings in the United States currently sell for about a 7% cap rate on average, and this average has fluctuated between 6.5% and 7.5% for the last ten years. These figures provide a ballpark estimate.

Since no investor would, or even could, buy all of the apartment buildings in the United States at once, knowing the average cap rate for the whole country has limited practical value. Undoubtedly, what most investors want to know is the appropriate cap rate to use to value a particular building.

US city apartments

Some turn to the Internet looking for the answer and inevitably come across research reports on cap rates prepared by national brokerage firms. These reports are helpful to some extent, but just about all of them fall short of providing what investors really need: enough information to come up with a cap rate for a specific apartment building.

Most research reports list the average cap rate for all apartment buildings that have sold throughout a city over the prior quarter or year. Some go further and show the breakdown of average cap rates for Class A, B and C apartment buildings within a city. This sort of detail is a small step in the right direction but still not all that helpful.

What’s the use in knowing the average cap rate for all apartment buildings in the city of Chicago? It’s a really big city with many different neighborhoods, and some areas simply have higher real estate values than others. For example, properties in Lincoln Park command a premium over comparable properties on the South Side.

Common sense tells us that several factors go into valuing real estate. We know intuitively that a brand new apartment building on the hottest corner in town ought to be worth more than an older building in a depressed area. It follows that the cap rate for these two properties should be different too.

current cap rate for apartments

That’s why multifamily buildings need to be evaluated on a case-by-case basis. What are the factors that go into determining a cap rate? It’s all the things your intuition tells you: location, building age, construction quality, interest rates, rental growth rates, etc. To determine a proper cap rate for a unique piece of real estate, investors need to consider all of these variables.

Lenders and investors often rely on local appraisers to value property. To be sure, appraisers can be an excellent resource, particularly for information about sale prices at comparable properties. For those looking to use the Internet to find current cap rates, there’s an excellent, free tool available at www.apartmentpropertyvaluation.com. The website prompts users to input location, income and expenses, and information about the physical characteristics of the building. It then returns a cap rate and valuation based upon all the factors our common sense tells us to consider.