How to find a cap rate to find market value
Member since 2022 · 8 posts · 3 votes
How to find a cap rate to find market value
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Wale LawalBusiness Member
Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votesThe capitalization rate is used to measure the profitability of commercial rental properties. A high cap rate indicates a relatively high income, relative to the size of the initial investment. However, there are also other factors to consider, such as risk and local market dynamics. Investors should be careful to consider a wide range of metrics in addition to the capitalization rate.
Since cap rates are based on the projected estimates of the future income, they are subject to high variance. It then becomes important to understand what constitutes a good cap rate for an investment property.
The rate also indicates the duration of time it will take to recover the invested amount in a property. For instance, a property having a cap rate of 10% will take around 10 years for recovering the investment.
Different cap rates among different properties, or different cap rates across different time horizons on the same property, represent different levels of risk. A look at the formula indicates that the cap rate value will be higher for properties that generate higher net operating income and have a lower valuation, and vice versa.
There are no clear ranges for a good or bad cap rate, and they largely depend on the context of the property and the market.
Say, there are two properties that are similar in all attributes except for being geographically apart. One is in a posh city center area while the other is on the outskirts of the city.
All things being equal, the first property will generate a higher rental compared to the second one, but those will be partially offset by the higher cost of maintenance and higher taxes. The city center property will have a relatively lower cap rate compared to the second one owing to its significantly high market value.
It indicates that a lower value cap rate corresponds to better valuation and a better prospect of returns with a lower level of risk. On the other hand, a higher value of cap rate implies relatively lower prospects of return on property investment, and hence a higher level of risk.
While the above hypothetical example makes it an easy choice for an investor to go with the property in the city center, real-world scenarios may not be that straightforward. The investor assessing a property on the basis of the cap rate faces the challenging task to determine the suitable cap rate for a given level of risk.
All the best!
NETWORTH BUILDERS5236 Reviews
18 Replies
- 3yBenjamin AakerPro MemberRental Property Investor · Brandon, SD · Member since 2015 · 1k+ posts · 1k+ votesCap rates on MHPs are going to be around 10%, with a lot of caveats (location, age, quality...) Have a close look at the numbers the seller is giving you. You can also talk to real estate brokers, multifamily associations, and property managers in the area to discuss local cap rates.
Remember that cap rates are only one way to help evaluate a property. They go up and down with the market, and you shouldn't base your offer simply on the value determined by the cap rate and their reported NOI. - Member since 2022 · 8 posts · 3 votes3y
Thank you for your response, I'll start with finding a broker that specializes in these types of properties. I may have to broaden my search. I definitely have been analyzing using other metrics. It is definitely a value add property and I am heavily educating myself in, as well as bringing on board a property manager that can deal with evictions. I am using some creative financing so my possibilities of making the deal work are very pliable.
- Member since 2022 · 8 posts · 3 votes3y
https://www.biggerpockets.com/...
Found this link, very helpful for anyone else wondering.
- Summerville, SC · Member since 2018 · 553 posts · 252 votes3y
I agree with @Benjamin Aaker. Cap rates are only 1 method, though they can be helpful. Also know that there are a few different ways to calculate cap rates.
At any rate, one thing you need to figure out on that MHP are the expenses. Also, please know that POHs (as viewed by banks or other lenders) are typically NOT given the value they deserve. This is important, as it has implications for refinancing OR when you sell, it could affect your Buyer's financing. Take home: there is not much hard value in POHs. (though there is super value to the investor from an "income-generated" approach).
What are the years on those SW? What is the going rate for lot rents in the area?
- Member since 2022 · 8 posts · 3 votes3y
Hi Dave, thank you for the insight, I am currently gathering data from the seller. They appear to be 1970 era. Sw.
- Member since 2022 · 8 posts · 3 votes3y
Quote from @Shane Schrader:
Hi Dave, thank you for the insight, I am currently gathering data from the seller. They appear to be 1970 era. Sw.
Also in my short discussions with the owner the revenues generated per month are 6000 a month, with each of the sw spots at 1k a month and 500 for the RV spots.
- 3yWale LawalBusiness MemberReal Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
The capitalization rate is used to measure the profitability of commercial rental properties. A high cap rate indicates a relatively high income, relative to the size of the initial investment. However, there are also other factors to consider, such as risk and local market dynamics. Investors should be careful to consider a wide range of metrics in addition to the capitalization rate.
Since cap rates are based on the projected estimates of the future income, they are subject to high variance. It then becomes important to understand what constitutes a good cap rate for an investment property.
The rate also indicates the duration of time it will take to recover the invested amount in a property. For instance, a property having a cap rate of 10% will take around 10 years for recovering the investment.
Different cap rates among different properties, or different cap rates across different time horizons on the same property, represent different levels of risk. A look at the formula indicates that the cap rate value will be higher for properties that generate higher net operating income and have a lower valuation, and vice versa.
There are no clear ranges for a good or bad cap rate, and they largely depend on the context of the property and the market.
Say, there are two properties that are similar in all attributes except for being geographically apart. One is in a posh city center area while the other is on the outskirts of the city.
All things being equal, the first property will generate a higher rental compared to the second one, but those will be partially offset by the higher cost of maintenance and higher taxes. The city center property will have a relatively lower cap rate compared to the second one owing to its significantly high market value.
It indicates that a lower value cap rate corresponds to better valuation and a better prospect of returns with a lower level of risk. On the other hand, a higher value of cap rate implies relatively lower prospects of return on property investment, and hence a higher level of risk.
While the above hypothetical example makes it an easy choice for an investor to go with the property in the city center, real-world scenarios may not be that straightforward. The investor assessing a property on the basis of the cap rate faces the challenging task to determine the suitable cap rate for a given level of risk.All the best!
NETWORTH BUILDERS5236 Reviews - Member since 2022 · 8 posts · 3 votes3y
Quote from @Wale Lawal:
The capitalization rate is used to measure the profitability of commercial rental properties. A high cap rate indicates a relatively high income, relative to the size of the initial investment. However, there are also other factors to consider, such as risk and local market dynamics. Investors should be careful to consider a wide range of metrics in addition to the capitalization rate.
Since cap rates are based on the projected estimates of the future income, they are subject to high variance. It then becomes important to understand what constitutes a good cap rate for an investment property.
The rate also indicates the duration of time it will take to recover the invested amount in a property. For instance, a property having a cap rate of 10% will take around 10 years for recovering the investment.
Different cap rates among different properties, or different cap rates across different time horizons on the same property, represent different levels of risk. A look at the formula indicates that the cap rate value will be higher for properties that generate higher net operating income and have a lower valuation, and vice versa.
There are no clear ranges for a good or bad cap rate, and they largely depend on the context of the property and the market.
Say, there are two properties that are similar in all attributes except for being geographically apart. One is in a posh city center area while the other is on the outskirts of the city.
All things being equal, the first property will generate a higher rental compared to the second one, but those will be partially offset by the higher cost of maintenance and higher taxes. The city center property will have a relatively lower cap rate compared to the second one owing to its significantly high market value.
It indicates that a lower value cap rate corresponds to better valuation and a better prospect of returns with a lower level of risk. On the other hand, a higher value of cap rate implies relatively lower prospects of return on property investment, and hence a higher level of risk.
While the above hypothetical example makes it an easy choice for an investor to go with the property in the city center, real-world scenarios may not be that straightforward. The investor assessing a property on the basis of the cap rate faces the challenging task to determine the suitable cap rate for a given level of risk.All the best!
Thanks Wale, I have been making phone calls to find what may be an applicable cap rate for this property in the area it is in. Having some pretty decent conversations.
- Summerville, SC · Member since 2018 · 553 posts · 252 votes3y
@Shane Schrader yes, continue to do your Due Diligence. Those SWs being 1960s models are likely worth next to nothing (as they are beyond life expectancy). Use this in your determination of purchase price. The overall value of the deal will be more biased toward the land, as opposed to the structures on it. You still need numbers on expenses.
- Member since 2022 · 8 posts · 3 votes3y
Quote from @Dave Rav:
@Shane Schrader yes, continue to do your Due Diligence. Those SWs being 1960s models are likely worth next to nothing (as they are beyond life expectancy). Use this in your determination of purchase price. The overall value of the deal will be more biased toward the land, as opposed to the structures on it. You still need numbers on expenses.
Okay, that's what I was thinking as well about the sw. I will post up numbers as soon as I get them.
- 3yWale LawalBusiness MemberReal Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
Quote from @Shane Schrader:
Quote from @Wale Lawal:
The capitalization rate is used to measure the profitability of commercial rental properties. A high cap rate indicates a relatively high income, relative to the size of the initial investment. However, there are also other factors to consider, such as risk and local market dynamics. Investors should be careful to consider a wide range of metrics in addition to the capitalization rate.
Since cap rates are based on the projected estimates of the future income, they are subject to high variance. It then becomes important to understand what constitutes a good cap rate for an investment property.
The rate also indicates the duration of time it will take to recover the invested amount in a property. For instance, a property having a cap rate of 10% will take around 10 years for recovering the investment.
Different cap rates among different properties, or different cap rates across different time horizons on the same property, represent different levels of risk. A look at the formula indicates that the cap rate value will be higher for properties that generate higher net operating income and have a lower valuation, and vice versa.
There are no clear ranges for a good or bad cap rate, and they largely depend on the context of the property and the market.
Say, there are two properties that are similar in all attributes except for being geographically apart. One is in a posh city center area while the other is on the outskirts of the city.
All things being equal, the first property will generate a higher rental compared to the second one, but those will be partially offset by the higher cost of maintenance and higher taxes. The city center property will have a relatively lower cap rate compared to the second one owing to its significantly high market value.
It indicates that a lower value cap rate corresponds to better valuation and a better prospect of returns with a lower level of risk. On the other hand, a higher value of cap rate implies relatively lower prospects of return on property investment, and hence a higher level of risk.
While the above hypothetical example makes it an easy choice for an investor to go with the property in the city center, real-world scenarios may not be that straightforward. The investor assessing a property on the basis of the cap rate faces the challenging task to determine the suitable cap rate for a given level of risk.All the best!
Thanks Wale, I have been making phone calls to find what may be an applicable cap rate for this property in the area it is in. Having some pretty decent conversations.
Most Welcome!
Get in touch with a local agent or investor and shorten your learning curve and save you a lot of headaches as they tend to understand the market better.
All the best!NETWORTH BUILDERS5236 Reviews - Real Estate Agent · Luray, VA · Member since 2016 · 459 posts · 293 votes3y
Something smaller like the property you are looking at should have a higher cap rate (lower price). As others have suggested I would reach out to Brokers in your market to determine a rough stabilized cap rate value. From there, you can determine what the property value can become with your operating plan and thus what it makes sense to offer. We evaluate deals more on this front as opposed to a going-in cap rate since we are mainly acquiring value-add properties.
Finally, assuming this is a mostly stabilized deal and you have determined a fair market cap rate, be sure NOT to include the park-owned home (POH) income in the cap rate valuation. This would have you significantly over paying for the property. POHs should be valued on a shell value basis and not income capitalization.
- 3yHenry ClarkPro MemberDeveloper · Member since 2020 · 4k+ posts · 4k+ votes
1. Don't trust anyone's NOI calc. Build the figures yourself.
2. Cost basis. Change the figures.
Land 1 1/2 acres. $50,000
Utility setup. Water, sewer, electric. $30,000
Trailers. $0
Signage, website, fence, road, landscaping, ????
Total $80,000.3. Comparables- wouldn’t spend the time liking for.
4. Income stream
If you use their NOI of $4,100 per month. Let's go with cash flow versus NOI. Sounds like you're not going to be on-site to manage.
NOI $4,100No depreciation expense $0
After taxes Say $3,000 per month.
$36,000 per year.We use a Cashflow target of a 8 to 12 year payback.
Say 10 years.
Thus willing to pay $360,000.
Do an Amort schedule using 25% down. $270,000 at 7% with 20 year amort. What is the difference between the $36,000 versus the P/I payments.
Change the above numbers.
Is there more land for value add? Then you can pay more.
Sell the trailers for $2,000 each to renters. Should increase your NOI.
If you have any open spots ever. Contact a trailer sales outlet. Let them know first year free lot rental for anyone buying from them, moving to your lot. You have to understand this logic.
Do a detailed asset asset purchase. Not a business purchase.
Assign values to everything by category. Have your accountant note categories. Push values towards the 15 year and less asset lives. If REP writeoff year one. If not early depreciation.
Seller finance. Go for 2/3 payment with the other 1/3 at the end of 5 years with no interest.
If this deal just breaks even. Still do the deal. Cheap learning if you’re just starting out.
Start small and Make Your Big Mistakes Early.
- 3yHenry ClarkPro MemberDeveloper · Member since 2020 · 4k+ posts · 4k+ votes
If you go with the cash flow model, and decide to own the trailers, build in buying 4 used trailers at $30,000 and paying $8,000 to have each moved and set up.
- Member since 2022 · 8 posts · 3 votes3yChase, thank you for the comment and help. What you mentioned is and will be utilized in my analysis. It's funny all of what you mentioned hit this deal almost spot on. Thanks again, and as I progress through this deal I will post up details so others can learn from this type of deal.
Quote from @Chase Louderback:
Something smaller like the property you are looking at should have a higher cap rate (lower price). As others have suggested I would reach out to Brokers in your market to determine a rough stabilized cap rate value. From there, you can determine what the property value can become with your operating plan and thus what it makes sense to offer. We evaluate deals more on this front as opposed to a going-in cap rate since we are mainly acquiring value-add properties.
Finally, assuming this is a mostly stabilized deal and you have determined a fair market cap rate, be sure NOT to include the park-owned home (POH) income in the cap rate valuation. This would have you significantly over paying for the property. POHs should be valued on a shell value basis and not income capitalization.
- Real Estate Consultant · Norfolk, VA · Member since 2017 · 345 posts · 201 votes3y
Back of the napkin analysis, Monthly Lot Rent (actual) x 60% x 12 / 10% = Current value of the park.
Market cap rate depends on the age, location, and condition of the park. When we have our park appraised, the appraiser used 9% cap while the park next to us which is much nicer is about 6% cap. And with the interest rate going up, in order to get a good cash flow you need to have enough spread between the cap rate and interest rate. With the size of the park, I would not go below 10%.
- Investor · Member since 2021 · 113 posts · 56 votes3y
Location, demand, condition income and expenses will determine the appropriate Cap rate. For this size park and not knowing anything else, id say more like a 13+ cap.
- Investor · Member since 2021 · 113 posts · 56 votes3y
Quote from @Chase Louderback:
Something smaller like the property you are looking at should have a higher cap rate (lower price). As others have suggested I would reach out to Brokers in your market to determine a rough stabilized cap rate value. From there, you can determine what the property value can become with your operating plan and thus what it makes sense to offer. We evaluate deals more on this front as opposed to a going-in cap rate since we are mainly acquiring value-add properties.
Finally, assuming this is a mostly stabilized deal and you have determined a fair market cap rate, be sure NOT to include the park-owned home (POH) income in the cap rate valuation. This would have you significantly over paying for the property. POHs should be valued on a shell value basis and not income capitalization.
Great point Chase. Unfortunately as you know, many park owners want to capitalize the park owned home income lol. Sound familiar?
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