Comments on: Determining the Value of an Apartment Building Investment Using Cap Rates http://www.biggerpockets.com/renewsblog/2008/03/03/determining-the-value-of-an-apartment-building-investment-using-cap-rates/ Learn, Network, Invest Thu, 20 Nov 2008 22:46:48 +0000 http://wordpress.org/?v=2.6.1 By: eugene http://www.biggerpockets.com/renewsblog/2008/03/03/determining-the-value-of-an-apartment-building-investment-using-cap-rates/#comment-59032 eugene Mon, 04 Aug 2008 20:16:45 +0000 http://www.biggerpockets.com/renewsblog/2008/03/03/determining-the-value-of-an-apartment-building-investment-using-cap-rates/#comment-59032 See http://www.incomeanalysis.com/boi.htm for the correct Annual Mortgage Constant derivation as per Jim's comment. See http://www.incomeanalysis.com/boi.htm for the correct Annual Mortgage Constant derivation as per Jim’s comment.

]]> By: John B. http://www.biggerpockets.com/renewsblog/2008/03/03/determining-the-value-of-an-apartment-building-investment-using-cap-rates/#comment-58148 John B. Sat, 05 Jul 2008 18:14:45 +0000 http://www.biggerpockets.com/renewsblog/2008/03/03/determining-the-value-of-an-apartment-building-investment-using-cap-rates/#comment-58148 Ted! Bravo to you for breaking it down financial concepts you are my Wharton School of Finance for the day. Ted! Bravo to you for breaking it down financial concepts
you are my Wharton School of Finance for the day.

]]> By: Jim http://www.biggerpockets.com/renewsblog/2008/03/03/determining-the-value-of-an-apartment-building-investment-using-cap-rates/#comment-56033 Jim Mon, 14 Apr 2008 19:44:57 +0000 http://www.biggerpockets.com/renewsblog/2008/03/03/determining-the-value-of-an-apartment-building-investment-using-cap-rates/#comment-56033 Ted: Actually, a 7.99% interest rate on a 30-year mortgage yields a mortgage constant of 0.087968, not 0.0799 as stated in the example. The mortgage constant is derived by calculating the periodic payment to repay $1 over the specified life of the loan (in this case 30 years) at the specified interest rate (in this case 7.99%), then multiplying this monthly mortgage constant by 12 (due to 12 payments in one year). If you have an HP12C calculator, input the following (on a monthly basis) 7.99% interest rate converted to monthly figure of 0.66583%, 30 year mortgage = 360 pmts, -$1 for PV and $0 for FV. Solve for PMT, which yields 0.007330676. Then, multiply by 12 for an annual indication of the mortgage constant (0.087968). The cap rate developed using your weighted average band of investment technique would actually be 0.092, or 9.2%. Capitalizing the $150,000 by 8.0% rather than by the 9.2% rate significantly overstates the value ($1,875,000 at 8% cap vs $1,630,000 at 9.2% cap). The reason the mortgage constant is higher than the interest rate on the loan is due to the compound nature of the interest the borrower pays over the life of the loan. Jim Ted:

Actually, a 7.99% interest rate on a 30-year mortgage yields a mortgage constant of 0.087968, not 0.0799 as stated in the example. The mortgage constant is derived by calculating the periodic payment to repay $1 over the specified life of the loan (in this case 30 years) at the specified interest rate (in this case 7.99%), then multiplying this monthly mortgage constant by 12 (due to 12 payments in one year). If you have an HP12C calculator, input the following (on a monthly basis) 7.99% interest rate converted to monthly figure of 0.66583%, 30 year mortgage = 360 pmts, -$1 for PV and $0 for FV. Solve for PMT, which yields 0.007330676. Then, multiply by 12 for an annual indication of the mortgage constant (0.087968). The cap rate developed using your weighted average band of investment technique would actually be 0.092, or 9.2%. Capitalizing the $150,000 by 8.0% rather than by the 9.2% rate significantly overstates the value ($1,875,000 at 8% cap vs $1,630,000 at 9.2% cap). The reason the mortgage constant is higher than the interest rate on the loan is due to the compound nature of the interest the borrower pays over the life of the loan.

Jim

]]> By: Chad Fisher http://www.biggerpockets.com/renewsblog/2008/03/03/determining-the-value-of-an-apartment-building-investment-using-cap-rates/#comment-55778 Chad Fisher Sat, 05 Apr 2008 05:27:27 +0000 http://www.biggerpockets.com/renewsblog/2008/03/03/determining-the-value-of-an-apartment-building-investment-using-cap-rates/#comment-55778 A great follow-up post to this would be to explore different cap rates in different US cities and why there is such variety. A great follow-up post to this would be to explore different cap rates in different US cities and why there is such variety.

]]> By: DrJohn http://www.biggerpockets.com/renewsblog/2008/03/03/determining-the-value-of-an-apartment-building-investment-using-cap-rates/#comment-55361 DrJohn Mon, 17 Mar 2008 22:42:58 +0000 http://www.biggerpockets.com/renewsblog/2008/03/03/determining-the-value-of-an-apartment-building-investment-using-cap-rates/#comment-55361 Good post! Good post!

]]> By: BlingBucks http://www.biggerpockets.com/renewsblog/2008/03/03/determining-the-value-of-an-apartment-building-investment-using-cap-rates/#comment-55034 BlingBucks Wed, 05 Mar 2008 05:18:08 +0000 http://www.biggerpockets.com/renewsblog/2008/03/03/determining-the-value-of-an-apartment-building-investment-using-cap-rates/#comment-55034 Great post Ted. I used to buy apartment buildings in my area for an 8% to 10% cap rate, but now that our local economy has heated up they are going for 4% to 5%. NOI is the same but higher prices are up pushing the cap rates down. Now rents have to play catchup! Great post Ted. I used to buy apartment buildings in my area for an 8% to 10% cap rate, but now that our local economy has heated up they are going for 4% to 5%. NOI is the same but higher prices are up pushing the cap rates down. Now rents have to play catchup!

]]> By: rick marnon, novi real estate http://www.biggerpockets.com/renewsblog/2008/03/03/determining-the-value-of-an-apartment-building-investment-using-cap-rates/#comment-55008 rick marnon, novi real estate Tue, 04 Mar 2008 13:14:27 +0000 http://www.biggerpockets.com/renewsblog/2008/03/03/determining-the-value-of-an-apartment-building-investment-using-cap-rates/#comment-55008 this is a huge part of analyzing commercial real estate investments. i learned this a while back when i started looking at making a investment into an apartment building. great post for the potential invester. this is a huge part of analyzing commercial real estate investments. i learned this a while back when i started looking at making a investment into an apartment building. great post for the potential invester.

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