Using Capitalization Rate to Value Properties

Don't stop there keep em coming!

It's nice 'round here. I think I'll stick around for a while. Hopefully, a long while. Thanks for the warm Welcome!
Les

That's the kind of information that makes this such a great site!

How do you determine what your net income is? Other than mortgage, taxes and insurance, what other costs need to be figured? Is there a standard used for per cent of time unoccupied or for maintainance costs

Both of these factors vary to some extent by market, but in my area (Central Ohio) the Vacancy factor is about 8.5% - 9%. I usually allow about 5% for on going Maintenance.

I AM NEW I NEED YOUR HELP PLEASE HELP ME SO COULD BE A GOOD STUDENT THANK VERY MUCH

I like this technique but all properties in an area are not equal..do you figure in estimated needed improvements as part of the purchase price?

Thanks, I found the article very helpful. I read all comments to date and with the other questions being asked on this topic, I will come back here periodically to read what answers arrise from 'those in the know'. I am also very, very new, but I have to get into this with everything I can muster.

Deb

How does one know the current cap rate in a city?

Debo

Cap Rate, or capitalization rate, is a popular calculation used by real estate investors. Using Capitalization Rate, an investor can:

1. Determine the expected net operating income based on the property’s listed price as compared to other similar properties sold recently.
2. Calculate the price you should offer for a property based on the prevailing cap rates in the area and the net rental income of the property being considered.
3. Using the value/asking price and the net income of a property, you can determine its cap rate and compare that to prevailing rates in the area.

Cap Rate is popular with real estate investors because it relates income and return on investment to cost, and comparable property data is usually easily obtainable. Let’s look at an example property to see how it works. You’re looking at a multi-unit apartment project listed for sale at $300,000. There are six units, with total net rental income after expenses of $24,000.

• Divide net income by the list price to get offered cap rate
• $24,000 / $300,000 = 0.08 or 8%

The cap rate for this property is 8% based on the list price and income generated. We can compare this to other similar projects recently sold in the area, as well as projects currently for sale. We find that recently sold similar properties average at a cap rate of 9%. We like this property, but want to be sure that the seller’s asking price is in line with the area and similar properties. We can already see that the cap rate is lower than the area average. We determine value or our possible offering price by dividing the net income of $24,000 by the prevailing cap rate of 9%:

• $24,000 / .09 = $266,667

As we can see, when compared to other similar recently sold properties, the asking price for this property doesn’t justify the purchase. It is necessary to get the cost down in order to bring it in line with other properties we could buy. We would want to offer significantly less, with the goal of at least getting the property at a price around the $266,000 figure.

If you’re in the seller’s position, you can develop your asking price using cap rate. If you have an eight unit project with net rental income of $58,000, and the area prevailing cap rate is 9.5%, then your value might be:

• $58,000 / .095 = $610,526

Add in some room for bargaining, and you’ll be in line with area competition.

Please re-read this again for the answer to your question.

thought i would bring this one back for those that need t

I enjoy reading all the information on the DG website. It feels like everyday I learn something new and its makes me a better prepared investor. Thanks for sharing this information with us. Believe and Achieve!

OMG I am going to have to read that a few more times. I am NOT good with numbers. But Im getting better.

I have to come back and read this a third time. I think I got it, but like I said, "It's late".

What if you have $14k for NOI, a high cap rate 35%, and you're trying to find the value using this formula? I am getting different numbers, than expected:

$14k / .47 (47% ROI) = $29,000 (value)

Does this sound right, on a $30k purchase price, or am I missing some numbers?