CARRY THESE CRAZY-SIMPLE FORMULAS WITH YOU!
THAT'S WHAT I DO FOR A QUICK EVALUATION
Hey Friend, Steve here. Now you can be an expert at explaining what a CAP rate is to your investors.
NOI div/ CAP Rate = Value
NOI div/ Value = CAP Rate
Value X CAP Rate = NOI
NOTES:
WHAT IS A CAPITALIZATION RATE?
A capitalization rate is, “What are you willing to pay for a property with all cash, which means no mortgage payment, on that specific property, in that specific neighborhood, in that condition, in today’s market?”. It’s not leveraged with debt (a loan), you don’t own anything on it. So, what are you willing to earn on your cash purchase? 4%, 5%, 6%, or…what percent? That’s the question you have to ask yourself.
However, rarely do investors pay all cash. By leveraging the purchase with a loan, returns for say class C properties are in the range of 15% to 22% overall.
So, a CAP rate is just a “bench-mark”, a “relative” calculation, relative to comparable properties. It’s one of the 3 methods appraisers use to appraise a property as part of the income approach. That’s all a CAP is…but, it’s the gold standard for placing a value on a commercial and multifamily property.
VALUE:
“Value” also means the price of the property
NOI:
Actual income less operating expenses NOT including the principal and interest payments
CREATE YOUR OWN NOI:
Never use the seller’s NOI. Always create your own, realistic numbers for income and expenses.
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There is more to learn about doing a quick evaluation and how to prepare for financing a commercial or multifamily property. We can help; we are experts.
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We are glad to help if you need advice on what to do next, what not to do, if you are upside down, and if you want to expand, buy, or refi. I’ve been there. SAVE THIS BECAUSE YOU'RE GOING TO NEED IT. WE CAN HELP!
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