Advice on Refi: How does NOI & CAP Rate Correlate to Value?

18 Replies

Hi BP,

I'm new to investing and looking for some help understanding NOI & Cap Rate and how they correlate to value. Specifically, will a commercial lender value our property with with these metrics for a potential refinance?

Here is some quick background:

  • 4-plex in Philadelphia, PA
  • Purchased with 3.5% down FHA loan in 2016 for $700k
  • House hacked for first 2 years
  • Renovated each unit as existing leases expired
  • All 4 units now vacation rentals (Airbnb/VRBO)

Because we originally purchased the property as our primary residence, we got a great rate (3.25%), but are locked into FHAs mortgage insurance.  Additionally, we have been able to drive significant rental income growth as a vacation rental property and I'd now like to try to unlock some equity to fund our next deal.


I've read several of the great resources on BP and I feel like I have a working understanding of NOI. Please correct me if I am missing some line items here, but here are the working numbers for the property:

+ Gross Rental Income: $150,000

- Cleaning Fees: ($21,600)

- Management Fees:  ($19,260)

- Property Taxes: ($3,700)

- Insurance: ($2,400)

- Trash & Local Tax: ($650)

- Utilities: ($7,200)

- Pest Control ($560)

- Supplies/Maintenance: ($1200)

- Acct/Legal: ($1500)

TOTAL EXPENSES = ($58,070)

Net Operating Income = $91,930


Based on my limited understanding of the local CAP rates for similar properties in Philadelphia, PA 19106 it looks like 5-6% is a realistic number. Let's call it 5.5% for simplicity.

Now we have:

  • NOI: $91,930
  • CAP Rate: 5.5%
  • Value: ?

And if the working equation is: NOI/Value = CAP Rate

Does this mean the value of the property is now $1,671,454?  

Is this how a commercial lender would potentially value the property?

Any insight or feedback would be awesome!  Thank you!

Your math looks correct. As the Cap Rate % goes down, the Property Value goes up. 

As for how a commercial lender values property, Cap Rate to my understanding is just one of a few methods the factor in to valuation. But I'm not an assessor or lender, so I could be wrong. Just what I've been told by other investors.

Thanks for the quick reply Nate.  Your note on valuation makes sense as well - I guess I need to get to the bottom of everything else the average commercial lender is looking for.


what about maintenance ( lawn care, snow removal)? a 4 unit is on the edge of being considered a commercial property, usually up to 4 units is still considered residential and the value is based on the market, like a single family home. the bank will get an appraiser out and could value it either way, if commercial, it is based on the cap rate for the area and your figure would be right. but banks will also look at DTI to make sure you will be able to pay the loan and want to see your past tax filings. since you already own the property they know you have experience running the property which would be easier to get the loan then if you were new and just starting to buy it. look up 4 family homes in your market and see what they are going for and have gone for.

4plex's are valued based on comps just like SFH's are so cap rate and NOI will have no affect.

Once you get to 5+ units then the property is valued based on the NOI and market cap rate.

Hi @Mike Cangi,

How are you and welcome to BP.

If I am reading correctly, you are seeking a bank and appraiser in the back end of a cycle of the current real estate market to take a complete income approach and not look at the market approach on a true 4 Unit Multi Family in the Philadelphia Market. It is good you understand the terms of Cap Rate but this applies to true multi family properties that are relevant to values and commercial lending of 5+Multi Family Units. Where in some cases income approach is impactful. In this case, you will have a hard time, appraisers are evaluating residential multi family properties whether portfolio or FNMA/Freddie by Market Approach and the income approach is looked at to comply with market rents and the debt service works by a stress test on your financials globally with the subject property based on FHA, Freddie or FNMA.

Diversified Investors Group the local Philadelphia REIA is hosting some Philadelphia Sub Groups that will pertain to this subject and you should good there calendar for dates.

Let me know if you have any questions.


Joe Scorese

I personally will not use income approach to value until I am at double digit units.
Underwriters may still use at 5+

@PatrickLiska @BrianGarrett @JosephScorese Thank you all for the insight here. I guess I was getting a little bit ahead of myself when trying to get creative and derive value. If 5 units is the potential trigger point, would it be worthwhile for us to consider adding another unit to the property? We have commercial zoning (CMX-3) and are allowed to add another floor to the property, which would give us plenty of space to add another unit. This would be a big capital expenditure, but would likely drive a 20% increase in NOI and thus an increase in value if the bank were to assess the property based on local Cap rates. - - Joe - regarding your feedback about complying with market rents, are you saying that the NOI for our property might not be as relevant as the current market rental rates for similar properties? Also, thank you for the details on Diversified Investors Group, I will definitely try to participate in an upcoming meeting. Thanks all!

Generally 4 units or under approasers use "Comps" to arrive at value. They do not use the income approach.  However all apraisals are base on 2 of three valuation methods, Comps, income, and cost  to build. Giving the apraiser your numbers and the bank your numbers may help.


You would need to figure your costs, if it costs you 150K to add that floor, will the rent cover your loan payments and increased taxes while still giving you a profit ? and will the added cost increase the value of the property based on the new NOI of the property vs the CAP rate for the area ? ( which you can find out either from a realtor or an appraiser ( i would trust the appraiser more). so if the cost of work does not add a lot more to the NOI to raise the value past what you are spending, then it's not worth doing, unless you can predict the future and know that the value of the property will appreciate in that area and you can make money on the back end when you sell.

@Patrick Liska - good feedback. I think the additional unit would definitely provide a substantial increase in NOI, but I thInk you make a great point about the upfront cost and I’m not sure if it would be the best investment long term (vs a potential down payment for another property)

Suggest you take it to a commercial lender to review.  I would challenge that you can really sustain $150K a year consistently without a few years of actual records.  If it is furnished I do not see cost of furnishing on your list. 

Yeah, I agree with you and I think that is going to be my next step @Sam Shueh

I'm sure they will challenge the $150k/year as well, but I actually think those are conservative projections based on what we have been doing for the past few months now that we have all the units activated.

Yes, the units are furnished as well, but I was not including that in the NOI calculation because my understanding is furniture would be considered CapEx for my use.

You can see the units here:

Originally posted by @Mike Cangi :

@NedCarey - Interesting.  Do you know of any good resources on how banks determine "cost to build"?

 Not offhand. An investor in your area that does new construction should give you some ideas. i would also Google it. I know there is at least one company that sells a book on new construction costs. 

I would be extremely hesitant to assume banks will value based on STR income. The STR market is extremely volatile with regulations changing regularly. Regardless of your present regulations banks may be extremely hesitant to value based on STR income and will fall back on the most conservative estimates.

Your valuation will likely be only based on residential market.

Find out what the market rents for a conventional 4 plex rental is and you will likley be closer to assessed value.

As others have said, typically NOI and a resulting CAP rate on determines the value on multi-family properties, which are defined as 5+ units. If you can build additional units, that is definitely something to consider! Given your gross rental income per unit, it might well make sense. Most appraisers will take into account both your actual rents (as verified by 2 years of tax returns) as well as what they consider market rents. Short-term rentals in many markets are a newer thing, so best to talk to a few lenders to understand which will take priority (your actual rents, or what they consider market (long term) rents).

@John D. - Great points here.

I love your idea of adding additional units and we are now looking at this more seriously.

We just completed a cash-out refinance of the property at a $1.025m value and that was based solely on market comps.  We are now considering a 4th story addition (2 studios) and conversion of the 2 bedroom unit into 2 separate studios.  This would net us 3 new units and bring the building to about 3600ft with 7 units.