How to work out what your Los Angeles apartment building is worth

Your apartment building is worth what a buyer will pay for the income it produces. For a building of five or more units, that price starts with net operating income, the rent you actually collect minus the cost of running the building, divided by a capitalization rate taken from recent sales of similar buildings nearby.

The details move the answer: which expenses count, whose property tax bill you use, which sales are truly comparable, and how far rent control limits the income a buyer can plan on.

What a buyer of an apartment building is paying for

A house buyer pays for a place to live. A buyer of a twelve-unit building pays for the rent checks, so the real question is how much money the building leaves its owner each year after the bills are paid, and how sure a buyer can be that it will keep doing so.

Financing turns that into a hard limit. Fannie Mae's appraisal report for small income property covers two to four units and stops there. From five units up, a building is financed as multifamily property, and the loan is sized from its income. Freddie Mac's small balance loan program, for example, describes counting income from recent actual rent collections or the current rent roll, less a vacancy allowance. It then requires the building's net operating income to exceed the loan payment by a minimum margin, called the debt service coverage ratio. A buyer who offers more than the income supports has to cover the gap with cash. That is why income, not square footage, sets the price.

For loans that follow Fannie Mae's rules, two to four unit buildings are appraised on its Small Residential Income Property Appraisal Report, which includes a survey of comparable rents, and the buyer may plan to live in one of the units. For those buildings, recent sales of similar small buildings carry more weight.

Net operating income and the cap rate

The income approach turns a year of income into a price. For an apartment building the steps are these:

1. Scheduled rent. Every unit's monthly rent times twelve, as the rent roll stands today.
2. Less vacancy and credit loss. An allowance for empty months and for rent never paid.
3. Plus other income. Laundry, parking and storage charges tenants actually pay.
4. Less operating expenses. Property tax, insurance, owner-paid utilities, repairs and maintenance, management, trash, landscaping, pest control, and inside the City of Los Angeles the rent registration and code enforcement fees.
5. Equals net operating income, or NOI. What the building earns before any loan payment.

Then divide. Value equals NOI divided by the cap rate, and a comparable sale's cap rate is its NOI divided by its price. At a 5 percent cap rate, every dollar of NOI supports $20 of price. At 6 percent, it supports about $16.67. Those rates are picked for easy arithmetic, not taken from any sale. They show that moving from 5 to 6 percent cuts the value by a sixth, so the rate deserves more of your attention than any other input.

Two things stay out of NOI. Loan payments stay out because NOI measures the building, not how its owner financed it. Depreciation stays out because it is a tax deduction, not money spent. California's own rule for the income approach, Property Tax Rule 8, excludes depreciation, debt retirement and interest on the money invested from the cost of producing the income, while counting capital spending or an annual allowance for it. In practice a new roof shows up either as a yearly reserve or as a cost the buyer subtracts from the price. The page on cap rates and NOI goes through every line.

Use the property tax a buyer will pay, not the one you pay

This adjustment matters more the longer you have owned the building. Under Proposition 13, a property is reassessed to market value only when it changes ownership, and after that its assessed value can rise no more than 2 percent a year. The tax rate is limited to 1 percent of that value, plus a rate for voter-approved debt. If you bought in the 1990s, your assessed value started from a 1990s price. A buyer's will start from the price they pay, so an NOI worked out with your tax bill overstates what a buyer can pay. The County Assessor's Proposition 13 page explains the reassessment rule.

Comparable sales, where every rate comes from

A cap rate is not a setting you choose. It is a measurement taken from buildings that sold, their NOI at the time of sale divided by their price. The gross rent multiplier and price per unit come from the same sales. The Board of Equalization's lesson on income multipliers describes deriving them by comparing the sale prices of closely comparable properties with their incomes. Everything rests on the sales you pick and how you measure them.

A sale is comparable when a buyer of your building would have weighed it against yours. Look for:

• A nearby location in the same city, since each city sets its own rent rules.
• A similar number of units and a similar unit mix.
• Similar age, construction and condition.
• The same rent control status. Inside the City of Los Angeles, a building with a certificate of occupancy issued on or before October 1, 1978 falls under the Rent Stabilization Ordinance, and one built later does not. Those are different products even on the same block.
• Rents in a similar position relative to market, because the buyer of a building with deeply below-market rents is paying partly for increases that may come later.
• A recent sale date, because cap rates shift as borrowing costs and buyer demand shift.

Then check how each comparable's numbers were built. A cap rate in a marketing package may rest on projected rents instead of rents in place, on the seller's old property tax instead of the buyer's new one, or on an expense list with no management fee and no reserves. Each of those inflates the NOI and so inflates the printed rate. Divide your own careful NOI by that inflated rate and you undervalue your building. Divide an optimistic NOI by a careful rate and you overvalue it. Consistency matters more than which convention you use.

Public records show that a sale closed, but the rent roll and expenses behind it sit with the brokers and appraisers who worked on it.

The gross rent multiplier and price per unit

The gross rent multiplier, or GRM, is a sale price divided by the building's gross annual rent, and you apply it by multiplying your own annual rent by a comparable's GRM. Price per unit is a sale price divided by the number of units. Both are fast, and both skip expenses. Two buildings with identical rent can have very different NOIs if one owner pays every tenant's gas and electricity, or if one roof is new and the other is failing. The Board of Equalization's lesson makes the same point, that multipliers should only be carried between properties with similar expense ratios. Treat them as a check on the income approach, or as a first screen among nearly identical buildings. The page on the gross rent multiplier and price per unit covers where each one misleads.

Which method leads for which building

Buyers and lenders look at every method. What changes is which one they lean on hardest.

The factors that push a building up or down, such as unit mix and soft-story status, are on the page about what raises or lowers value. If your building is under rent control, read how rent control changes value before you trust any figure built on projected rents.

Run your own numbers

The calculator below runs the income approach and the two quick checks side by side. It starts empty on purpose. There are no default cap rates or multipliers, because a rate means nothing without the sales behind it, and this site has no sales data it can cite for your building. Take every rate from recent sales of similar buildings near yours.

1. Number of units. Every unit, occupied or not.
2. Total monthly rent. What each occupied unit pays now, added together. For a vacant unit, use a realistic asking rent and raise the vacancy figure to cover the months it may sit empty. You can add monthly laundry, parking or storage income here too, and the GRM result will then include it.
3. Vacancy and credit loss. A percent of rent, drawn from your building's actual history over the last few years.
4. Annual operating expenses. Dollars from your last twelve months of actual bills, or a percent of collected income. Use the property tax a buyer would pay at the price you are testing, and leave out mortgage payments, depreciation and one-time projects.
5. Cap rate, low end and high end. The lowest and highest rates among your comparable sales, measured on NOI built the way you built yours.
6. Gross rent multiplier, optional. This field multiplies your annual scheduled rent. If the GRM you were given was figured on monthly rent, divide it by 12 first.
7. Price per unit, optional. From the same comparable sales.

The line under the results gives expenses as a percent of collected income. If the three values land far apart, find out why before you pick one. The likely reason is that your expenses or rent levels differ from those of the buildings the GRM and price per unit came from, and only the cap rate figure accounts for that. Because a buyer's property tax depends on the price, run it twice, once with a tax estimate at your first answer and again with the tax at the new figure.

The records you need before the number means anything

A serious buyer will ask for all of these before closing.

• A current rent roll. Unit, bedrooms and bathrooms, rent, move-in date, the date and amount of the last increase, deposit, and any concessions or side agreements. Under rent control the move-in dates matter as much as the rents.
• Twelve to twenty-four months of income and expenses. Actual collections and actual bills, not a budget.
• Utility bills and the meter setup. Which utilities the owner pays and whether units are metered separately.
• The property tax bill and insurance declarations. A buyer will recompute the tax, but the bill shows the voter-approved debt rate on top of the 1 percent base.
• A list of capital work with dates. Roof, plumbing, electrical, windows and seismic work, with permits for each.
• Permits and certificates of occupancy. A unit without them is a risk a buyer will price.
• Rent control status. In the City of Los Angeles, LAHD's RSO property search looks up whether a property is under the RSO.
• Zoning, permit history and violations. The City's ZIMAS map shows a parcel's zoning, building permit history and code enforcement violations on record.
• Soft-story status, if it applies. Whether the building falls under the City's soft-story retrofit program and where the work stands.

Why an online home estimate misses on a five-plus unit building

Zillow describes its Zestimate as a computer-generated estimate of a home's market value, built from home facts like square footage, lot size and bedroom and bathroom counts, from tax assessor records, and from listing and sales data. Zillow says it is not an appraisal. None of the inputs it lists is a rent, an operating expense or a lease.

For a house, that list covers much of what drives the price. For an apartment building it misses what the buyer is paying for. Picture two ten-unit buildings on one block, built the same year, with the same square footage. One has tenants near market rent and an owner who pays no utilities. The other has tenants who moved in decades ago under the RSO, one gas meter the owner pays, and a roof at the end of its life. A model reading home facts sees two identical buildings. A buyer sees two incomes, two repair bills and two prices.

Other numbers that are not your building's value

• The assessed value on your tax bill. Under Proposition 13 it grows from a base year value, set when the property was reassessed at a change in ownership, by no more than 2 percent a year, so after long ownership it says little about today's price.
• The insurance replacement cost. It estimates what rebuilding would cost, which is a different question from what a buyer would pay.
• A price per unit you heard about. Without the rents, unit mix and condition behind it, it is a rumor.

How to get a real number

An opinion of value from a broker. A listing agent builds one from your rent roll, your expenses and recent sales to recommend a price. California's appraiser law, Business and Professions Code section 11302, says an opinion of value a real estate licensee gives in the ordinary course of licensed work is not an appraisal and may not be called one. Ask to see the sales it rests on and how its NOI was built.

An appraisal. A licensed appraiser, regulated by the state's Bureau of Real Estate Appraisers, prepares a written report for a stated purpose and date. Lenders order them for loans. If the value is for an estate, a divorce, a partner buyout or a tax filing, ask the attorney or CPA handling it what kind of valuation they need. Shaya Lowenstein is a real estate agent, not an appraiser, attorney or CPA, and that question belongs to them.

The market. In the end the building is worth what a buyer signs for and closes on, and the other two are forecasts of that number. Shaya can prepare an opinion of value from your rent roll and expenses and walk you through the comparable sales behind it, whether you plan to sell this year or want to know where you stand first.

What the building is worth and what you keep

Inside City of Los Angeles limits, Measure ULA taxes the entire sale price once it crosses a threshold, not just the amount above it. For transfers on or after July 1, 2026, its 4 percent rate applies to consideration greater than $5,400,000 and its 5.5 percent rate to consideration of $10,900,000 or more, according to the City's Office of Finance. A price a little above either line can leave you with less than a price just below it. The thresholds adjust every July 1, so check the current figures before you settle on a price near one.

Loan payoff, prepayment terms, closing costs and income tax on the gain come out of the price too. The tax side depends on your basis, your depreciation and how the sale is structured. Take it to your CPA before you sign a listing, not after you accept an offer.