This section is from the book "Practical Real Estate Methods For Broker, Operator & Owner", by Thirty Experts. Also available from Amazon: Practical Real Estate Methods for Broker, Operator, Owner.
Fundamentally the only measure of the value of a building which is practicable is that of rental or profit; and the value of any building is better determined upon its income, as a measure of its adaptability and usefulness, than in any other way.
If we take a lot 25 x 100 to be wort..................
And allow that it should yield 5% net to the owner in rental, we have, as its rental value
If we erect upon this lot a six-story modern tenement at a cost of $25,000, we have a total investment of $45,000, upon which we find that, according to the average rate of interest on equal security we ought to get 5% net out of the ground value and 6% net out of the building value, or $2,500 clear per year out of the whole. At this rate the lot portion of the investment pays $1,000 and the building $1,500.
Upon estimating the cost of operating such a tenement, where hot water (but not steam heat) is supplied night and day to the tenants, and allowing $500 per year for depreciation in value, we find that it will be necessary to get a gross rental of at least $4,800 for the whole, to be collected from tenants occupying 52 or 65 rooms. In order to pay such an aggregate rental each tenant will be obliged to contribute about six dollars per room per month.
If this estimated rental proves to be higher than that which is paid by others in the same or a similar locality, then such a tenement is not the proper improvement for the lot, or is not the most economical form of improvement. In order to make this lot available for the purpose of a tenement house improvement, therefore, it becomes necessary to adopt a more economical method of improvement.
Another lot at $20,000 adjoining is, therefore, added, and the new six-story improvement covering 70% of 50x100 will contain double the number of rooms, and will cost only $45,000 to build, a saving of $5,000 in construction. This makes the investment $85,000 and the gross rental $9,600. In this house only one staircase is required, with its well for an area twice as large as in the first instance, and but one hot water heating plant of a little larger size, so that proportionately the cost of operation is considerably decreased and the whole proposition becomes more valuable because it is more profitable.
This little sketch of the treatment of a city lot may give you an insight into the proportionate relations of gross and net rentals to fee values and cost of building. In estimating the value of real estate which comprehends the value of the improvements thereon, we usually classify the various common forms of such improvements about as follows: