Calculating an NOI

Once you have the ROI you can calculate the Cap Rate. Cap rates are a measurement of how a property is going to produce income. This measure is one of the most common in all of commercial properties.

To find the Cap rate you will:
Take the NOI and divide it by the sales price or purchase price.

For example if I had a NOI of $25,000 per year and a sales price of $250,000 I would have a cap rate of 10.

Most cap rates will fall in the range of 7-9%. Above a 9% cap rate is usually called a good deal but may give us an idea of the area as well.

You may find the area or property has:

A weaker than average economy.
Older building with possible higher capital improvements.
Lower rents accepted.
Higher possible vacancy.
Operating expenses are increasing faster than income.
Bad crime rate.
Lower investment grading.

Looking for high cap rates can create great income but you should know the value of what you are looking for. Investment groups that may finance investments at higher LTV's (loan to values) look for cap rates above 10%.

Suppose you are interested in finding properties with a cap rate above 10% how can you do this?

The two easiest ways to find multifamily / commercial owners is:

1) Apartment associations. Every state has an apartment associations and a vast number of apartment owners are a part of the associations. Accessing and associating with these groups can yield opportunities for finding great priced multifamily information.

2) Accessing "mailing list companies" by looking them up on Google. There are companies that will sell you lists in a particular area for owners of multifamily.

3) Other ways can be CCIMs, Realtors, commercial listing sites etc... But the first two will offer more private selections than others.

NOI can be an easy number to smudge per say. Often you will find properties listed with future. This is not bad just misleading. Listing Realtors will often do this to help support their price. When getting number for a property make sure you see the receipts - all of them. Those do not lie and you can create an accurate expense from this. Without this you may purchase the property at an inflated price.

A lot of realtors will show a property with numbers pro forma. In other words, "assuming the property had 90% occupancy it would look like this".

Ridiculous and irrelevant. Make your offer off ACTUAL numbers only. They are the only ones that count.

If a property is 40% vacant why should the seller get credit for NOT being able to fill it up with tenants??

Pro-forma is the most common numbers listed. They make it difficult to truly analyze a property from first view and may help to distort you vision of the property. You must do due diligence on all the properties you are viewing to make sure you are getting true, real numbers as wmark stated.

I was a bit confused at first by your post. I thought originally you were writing of how "we" as investors can use the Pro Forma. But I think what you're saying is that, don't trust numbers you get from anyone (another wholesaler, realtor etc) you need to do our own due diligence.

Although, I have a question for you. I've seen more than one (and actually it's usually the more successful REI's) actually create some sort of Pro Forma for their "Buyer" in order to further display their "potential" ROI or CAP rate.

Is this something that you agree is helpful. If so what information would you suggest be in a Pro Forma to a prospective buyer?

Thank you in advance for your help...