Most owners start with a number they heard from a friend or saw on a home value website. Neither one tells you what a buyer will pay for your building. Buyers price apartment buildings on income, then check that income against what similar buildings have actually sold for nearby. Here is how that works in San Francisco, San Mateo County, Santa Clara County and the East Bay.
1. Start with the rent roll
The rent roll lists every unit with its current rent, lease start date, move in date and whether it is subject to rent control. It is the first thing a serious buyer asks for. Buyers study two things: what the building collects today, and how far those rents sit below market. A building full of long term tenants paying well below market collects less now but may offer upside over time, and buyers price both.
2. Operating expenses and net operating income
Net operating income, or NOI, is the rent you collect minus the costs of running the building, before any mortgage payment. Typical expenses include property taxes, insurance, utilities the owner pays, repairs and maintenance, management, and a reserve for replacements. One point owners often miss: under Proposition 13, property taxes are reassessed when the building sells, so a buyer underwrites taxes based on the new purchase price, not on what you pay today.
3. The four numbers buyers use
Philip values every building on four key metrics, the same ones serious buyers and lenders check. Each tells you something different, and together they show what the market will actually pay.
Cap rate. NOI divided by price. To estimate value, divide your NOI by the cap rate similar buildings are trading at today. For illustration only: a building with $200,000 of NOI valued at a 5 percent cap rate is worth about $4,000,000. Cap rates move with interest rates, location and building quality.
Price per unit. Sale price divided by the number of units. It lets buyers compare buildings of different sizes, adjusted for unit mix: a building of two bedroom units should sell for more per unit than one full of studios.
Price per square foot. Sale price divided by the building's square footage. It catches what price per unit misses, such as unusually large or small units.
Gross rent multiplier, or GRM. Price divided by the building's gross annual rent. A $4,000,000 building collecting $320,000 a year in rent trades at a GRM of 12.5. GRM is quick to calculate and easy to compare, but it ignores expenses, so buyers always check it against the cap rate.
4. Putting the four together
No single metric sets the price. If the cap rate points to one number and the price per unit, price per square foot and GRM of recent comparable sales point to another, the gap usually explains itself once you look at unit mix, condition, parking, rent control and location. A sound valuation lands where all four line up.
5. Rent control and tenant mix
Rent rules change the math. In San Francisco, most units in buildings first occupied before June 13, 1979 fall under the city's Rent Ordinance. In San Jose, the Apartment Rent Ordinance covers buildings with three or more units built and occupied before September 7, 1979, and generally allows one increase of up to 5 percent per year. Many other California units fall under the statewide Tenant Protection Act, AB 1482, which limits annual increases to 5 percent plus local inflation, with a 10 percent ceiling. Several East Bay and Peninsula cities have their own ordinances as well. Coverage depends on the specific building, so confirm it before you price.
6. How values differ across the Bay Area
The same rent roll can be worth very different amounts in different places. Buyer demand, rent rules, property tax add ons and the supply of comparable sales all vary from San Francisco to San Mateo County, Santa Clara County and the East Bay. That is why a citywide average is a poor guide to what your building will sell for.
Get a number you can act on
Online estimates cannot see your rent roll or your expenses, so they are not reliable for apartment buildings. For a confidential broker opinion of value with the comparable sales behind it, request a valuation or call Philip Batlin at (415) 625-2189.
