I am reading through Ken McElory’s The ABC of real estate investing and trying to apply the five steps property evaluation method to get the property value and price offer, knowing that:
A. The property valuation or purchasing price (Already set by me evaluator for this particular property) is $298000.
B. I have the NOI of 21523
C. And the Capitalization rate of 7.22%
I already got this Capitalization rate (7.22) by dividing the NOI / Purchasing price or C=B/A.
The suggest equation for the price offer goes like this:
Property value and price offer = NOI / Capitalization rate or
Property value and price offer = B/C
And needless to say, the answer is defiantly A.
I am getting nowhere with changing the order or these variables. So, how can I arrive to the price offer? Am I missing anything? Any alternative method?
Your offer price still has to has to take into account some other metric you are looking for, be it Cash on Cash, Internal Rate of Return, etc. You also have to take financing into account.
For example, on the this 298k property with this NOI, you still have to have a goal COC or IRR by a certain time period. Your offer price will have to be lower if you want to make 15% cash on cash by year 1 vs year 3.