Transmission Rebuild


Never at a loss for relating almost anything to income-based analysis for real property, I find a ready analogy in the renovation of an older car. 

Just consider the rebuilding of an auto transmission as an example of how important it is that all components work together:

Tranny Components Income Value Components
Clutch facing Rent rate
Flywheel Vacancy rate
Gear roller bearings Expense ratio
Synchros Overall cap rate

Your success in the auto renovation will be limited at best if you do only a partial rebuild of transmission components, like switching out only a clutch facing when the flywheel and bearings are also worn. You may get instant gear engagement, but the ride will suffer greatly from related noise and vibration.

If you try to skimp on updating an older income model for property valuation, much the same will be true. Update only the rental rate, and the outcome won’t be an accurate value because the outdated components of vacancy, expenses, and cap rate remain.

The examples are similar, but there’s one main difference between them… with a partial renovation, the car might still get you from point A to B, albeit with some annoyance. But that partially updated property model simply won’t get you to market value.