Multifamily Acquisitions: Valuation - Yours

Multifamily Acquisitions: Valuation - Yours

Modern psychology tells us that humans place a higher value on things they own versus what someone else would value the same item. The argument is that if it's your favorite coffee cup, rug or a 200 unit multifamily apartment building your valuation of your "stuff" will be higher than the value assigned by another person.

Reported on MultifamilyBiz.com multifamily owner/manager Investcorp made a single investment of $220 million dollars recently.  Was this a good deal?  Buyer and seller reached a strike price.  We can presume equity and debt signed off.  The age-old answer is; time will tell.

There are deals of every size occurring where sentiment is part of the valuation process.  Yes, we need appraisals, financials, common sense operational projections and forecast.  At the end of the day there is usually just a handful of people concluding the valuation is reasonable.

Excluding trophy assets the name of game is yield, of course.  How does a real estate investor capture yield on invested dollars?  See my post on How To Measure a Winning Purchase.

We are all "bargain hunters" at some point; whether shopping for a car, a house or investment grade asset.  The balance an investor attempts to strike is between their desire to be fully invested and making prudent investment decisions.

There are numerous forms of "valuation".  Many are technical in nature, some just rules of thumb. From the Stern School of Business at New York University here is an excerpt from a research paper on valuing financial assets.  The PDF is 39 pages and technical.  This seems to be one chapter from a dissertation, but there is some great reading here on discounted cash flow and the psychology of real estate investors.

...we are assuming, as we did with publicly traded stocks, that the marginal investor in real assets is well diversified.  Are the marginal investors in real estate well diversified? Many analysts argue that real estate investments require investments that are so large that investors in it may not be able to diversify sufficiently.

This is a fact of real estate life; many/most real estate investors are over-weight in a single investment category (real estate) and likely over-weight in a single asset type within this class of investments. This is a primary reason why we value our assets higher; we are fully invested.

Being aware of how easy it is to over-weight into a single asset class when calculating your personal net worth provides some much-needed clarity.  It should also spark your thinking about appropriate investment diversification.

This article is intended to be informational only and does not provide legal, financial or accounting advice. See Multifamily Insight and video at John Wilhoit.com.

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