How do I calculate the Cap Rate?
by Kevin Davis
The Cap Rate is ratio that is used to determine
the value of income producing properties. Once you move into
commercial real estate or you are buying multi-units over
3 units, you will want to consider the cap rate in order to
value your property. For triplex and below, comparable values
are used similar to the appraisel for a single family home.
The Cap Rate is simply the net operating income
divided by the sales price of the property. The result is
usually expressed as a percentage. As a general rule, I am
usually looking for cap rates over 10%.
You can normally get an average cap rate for
the area you are investing in through an appraiser or lender
that has been working with properties in that area. You can
then evaluate your property and compare it to the prevailing
cap rate to see if the investment makes sense.
Cap Rate = NOI / Value
Estimated Value - NOI / Cap Rate
Example 1: A property has a NOI of $135,000
and the asking price is $1,000,000.
Cap Rate = $135,000 / $1,000,000 X 100 = 13.5
%
Example 2: A property has a NOI of $120,000
and Cap Rates for the area for this type of property are 12%.
Estimated Market Value = $120,000 / .12 = $1,000,000
NOI = Gross Income - Vacancy Loss - Operating
Expenses
Operating Expenses do not include depreciation,
interest and amortization.
Just a quick note in closing. For those in
the Los Angeles area, Rick Dearr and I will be in the Little
Saigon area Dec 12-14. We will also be driving down, so we
will be passing through Las Vegas and meeting up with our
realtor Jason Tomei as well. If you would like to meet with
us while we're out and about in these area, drop me an email
and we can setup a time to meet.
I can also be reached at 801-918-5640
Have a great week. If you go out to Ryze.com,
stop by my guestbook and leave me a note.
