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South Bend Redevelopment Commission <br />Regular Meeting –August 6, 2010 <br /> <br />6. NEW BUSINESS (CONT.) <br /> <br />B. Airport Economic Development Area <br /> <br />(2) continued… <br />still market based. They look at what a rental <br />sold for, and divide the sales price by the <br />gross annual rent, to get a multiplier effect. <br /> <br />Example: a rental house sells for $30,000, <br />which has rented for $500 / month, or $6,000 <br />/ year. $30,000 / $6,000 = a multiplier of 5. <br />You would then multiply the annual rent of <br />another house by this multiplier to get a <br />value. The multipliers have many factors <br />that can effect their usefulness, such as area <br />of the city, condition of the properties, etc. <br /> <br />Capitalization Rate (Cap Rate): <br />The cap rate method is used almost <br />exclusively on larger commercial income <br />producing properties. To comfortably use <br />this method, appraisers require 3 years of <br />operating statements, which reflects the <br />historical income and expenses of the <br />property. Appraisers don’t consider using <br />this approach without a statement of an <br />extraordinary assumption, because this <br />information is not generally available, or is <br />based solely on information the owner <br />provides. <br /> <br />The Cap Rate method looks at the gross <br />income and deducts for expenses to arrive at <br />a net income stream. This net income is then <br />divided by the cap rate, usually in the 10% <br />range. Banks do use this method to value <br />single family rentals, especially for good <br />customers. Appraisers, because of the <br />Standards they have to follow, shy away <br />from this method for single family rentals. <br /> <br /> 11 <br /> <br />