Cap rate and evaluation help

[Kyle Woodruff]

Looking for some expertise in the area of evaluating a commercial property. It's a 3 unit with 13 storage units. It is a unique property and I'm having a heck of a time trying to get an evaluation...I've been googling cap rates and I'm having a hard time grasping the concept because what I read says to base the cap rate on buildings in your area but how do I find the average cap rates ? Help

[Kim Meredith Hampton]

@Kyle Woodruff because it’s so unique, you may be better off looking at duplex/triplex properties and what they sell for in the area, then looking at local storage units and their average price points. Then you can figure out the cash flow and expenses from both assets. This will give you a good idea on cap rates. 

Has the seller of the property provided you with financials?

[Kyle Woodruff]

@Kim Meredith Hampton thank you for the reply Kim...she hasn't provided financials ..just what she charges for the housing and storage units. I have been researching and I'm hearing you can find the value by taking the NOI and dividing by the cap rate in the area but I am having a heck of a time figuring out how to find cap rates in my area lol

[Kim Meredith Hampton]

Originally posted by @Kyle Woodruff:

@Kim Meredith Hampton thank you for the reply Kim...she hasn't provided financials ..just what she charges for the housing and storage units. I have been researching and I'm hearing you can find the value by taking the NOI and dividing by the cap rate in the area but I am having a heck of a time figuring out how to find cap rates in my area lol

Since you have income, use the old 35% for expenses. Then you take that dollar amount from the NOI and divide by what she wants or what you want to pay and that will give you the cap rate.

If you are getting commercial financing, they most likely will use my suggestions on the two different assets, but most importantly, they look at the performance of the asset and how much cash flow it generates 

[Kyle Woodruff]

@Kim Meredith Hampton

Okay so my rent and storage unit total is $2085 a month multiplied by 35% would give me roughly 1335. Multiply that by 12 gives me 16,260. Purchase price of $105,000.

16260/105,000= 15.4% ...did I do that right?

[Russell Brazil]

3 unit property really isnt going to be valued based on a cap rate. Compare it to other 3 unit properties, then add a number on top for the storage units.

[Kim Meredith Hampton]

@Kyle Woodruff Hope this helps based on your numbers (this is how I calculate;

$2085.00 X 12= $25.020 gross annual rent

-35% for expenses= $8757 (but would imagine they are much higher than that. 

=NOI $16,262 : $105,000= 15.5. cap rate

If this is true, than this would be one helluva deal based on these numbers

Underwriters will typically use the 35% rule, but myself, I use 50% and go from there,. The sellers don't usually tell the whole story!

You can usually look up taxes estimations on the county tax rolls. Need to take into account how utilities work on each asset, lawn care, maintenance, vacancy, age of roofs, electrical, ac's, plumbing, see rent rolls, leases etc...

[Kyle Woodruff]

@Kim Meredith Hampton

Thanks Kim. Property needs some updates for sure but I was able to buy on seller finance so I'm looking at fixing up the property before I refinance. I appreciate the education. This is scary stuff, but scary in a good way..like riding a roller coaster lol

[Paul Moore]

Hi @Kyle Woodruff. You got some great advice above from @Kim Meredith Hampton. Honestly, I would highly recommend that you pay someone locally to help you evaluate this deal. A seasoned commercial real estate investor that you can find at a local real estate meetup group, if there is one nearby, could be a priceless help to you right now. I would say your next step would be to get a great mentor or advisor to help you evaluate this before going forward. Happy investing!

[Kyle Woodruff]

Thanks for the reply @Paul Moore I have been watching your videos and then rewatching in case I missed something. I am on the hunt to fund people in my area. Finding someone to learn from is crucial! Thanks again for the feedback!