The Hobby Apartment

The property is a 12 unit, 3 story over garage level, brick and steel luxury apartment building built in 1990. It is located in a very upscale suburb of a major metro in the Midwest, within an easy walk to the train to Downtown. Ownership has provided Income & Expense information for the last three years.


Other than a very few exceptions like this property, the local market has little existing stock of luxury apartments; homeownership in this jurisdiction is strongly predominant. Interior finishes of the building well exceed the local market in quality of materials and workmanship. As a result, the property presents a valuation challenge.


It doesn’t fit the cost tables worth a darn. Sales comparison becomes a leap of faith in the adjustment grid. And, after reviewing the actual rental history, it’s evident that this project obtains 60% higher rent than the average rental rates found at most apartments in the local area. So, ownership’s provision of income information is of immense help given the dearth of comparable rent info.

However, the actual expense experience is much less helpful… clearly the property is intended to operate at a near break even level, with expense ratios from the past three years at between 80% and 90%. More padding here than on an umpire!


Perhaps this particular owner is operating the property like a hobby and not like a profit-making venture… upgrading the building and keeping it modern and occupied. That would account for the high expenses, as ownership attempts to offset the income.


Regardless of the reason, the question remains: what to do when some provided information does not appear to be market based? Tap available sources that are relevant to model this property via the income approach. Pair the actual rents & vacancy rate with expense & capitalization support from well regarded research sources. Apartment expense ratios stratified by type, age, size and regional location are available from national management and apartment owners associations. Cap rates are surveyed and reported by many broker sources. This information is available at reasonable cost on a subscription basis, and is vital to the tool bag.

The point here is data can be selected from from multiple sources to solve the valuation dilemma. Your test for the data to use is relevance, not consistency of source.