how do i know what my cash flow is goin to be?Can U analyze this?

21 Replies

i know loopnet isnt going to have any good deals, im just using it to practice analyzing properties.

Once i find out the Income and expenses, i get the NOI by using the 50% rule.

Next i get the cap rate right? So this property that im looking at, has a NOI of 320k. I now need to divide 320k by my mortgage. But i dont have a mortgage and i dont know how i am going to fund the deal. So how would i figure out my cap rate?

so they are asking $5.6 million for this property.  To figure out the cap rate, does it matter how its financed?

If i do 50% owner financed, and 50% bank financed at 30 years or 15 years,  Does it matter as far as cap rate goes?  

do i just calculate that the full 5.6 million is going to be 100% financed?

Does not include debt service. You are probably more interested in figuring out your cash on cash return which is the return on your money invested.

So am i actually dividing by the purchase price instead of the mortgage?

Don't take this the wrong way, but you need to least the basics first, before you shotgun a bunch of questions. I'm willing to help, @Jordan Moorhead is willing to help and so is the majority of the BP community but you need to take some time first to educate yourself. Read this and this and really any commercial real estate book, podcast, site out there.

At a minimum, memorize the formula:

Cap Rate = NOI/Value

or expressed another way 

NOI/Cap Rate = Value

Practice this, analyze properties and confuse yourself will learn the most this way. And then ask questions to understand the fine points.

Again, not trying to be a jerk but you will get a lot further this way. Good Luck!

"What Every Investor Needs To Know About Cash Flow" by Frank Gallinelli., Every investor should have that book.

Thanks guys.

I think i have a real basic understanding of NOI, Cap Rates, debt service and cash flow. The thing that keeps throwing me off is i dont know what my financing is going to be. So i dont know how to practice analyzing these deals on loopnet if i have no clue what my financing would be.

@Scott Skinger im looking at those links now, they should give me a much better understanding. thanks

If someone were to send you a commercial deal, you would within seconds be able to tell whether you are interested or not right?  

What are you looking at to quickly be able to tell?

Should i already know what my financing is going to be before i am analyzing these deals?

@Account Closed to answer your last question, to analyze the property quickly you want to know 

  • income (rents, covered parking, laundry room, utilities, etc)
  • expenses (utilities, landscaping, pool maintenance, payroll, tax, insurance, etc)
  • building age, roof age, AC units age, water heaters age (all roughly)
  • owned free and clear? mortgage?

I am with @Scott Skinger and you should read some of the info out there to get more familiar with commercial real estate. I recommend Making big money with small apartment buildings, Brad Sumrok's $100 online course, and some of the bigger pockets books as well.

Lastly, i am in San Antonio, if you are willing to do the short drive from Austin, let me know and we can meet for coffee and i will be happy to review your questions with you.


@Mauricio Ramos Thank you.

So the main thing is knowing the NOI and Cap rate.

If i find a C class property that has a 10% cap rate. What would make that a great deal vs a bad deal.  a C class with a 5% cap would be bad, vs a 15 % cap would be great?

@Account Closed

You definitely need to know your financing plan/options before you start.  

How much personal cash do I have to invest?

Can you get commercial financing?  What are the max amount, terms, and rates?

Can I get Hard Money or Private Money Lenders?  Amounts, rates, and terms?

Do I need equity partners?

Work these options out first.

Originally posted by @Account Closed :

@Mauricio Ramos Thank you.

So the main thing is knowing the NOI and Cap rate.

If i find a C class property that has a 10% cap rate. What would make that a great deal vs a bad deal.  a C class with a 5% cap would be bad, vs a 15 % cap would be great?

Cap rate has nothing to do with a good or a bad deal. It all depends on whether or not you can increase the NOI and by how much.

@Nick B.

so how do i know if its good NOI or not? Isnt cap rate basically the same thing as ROI?

@John Thedford John i just bought that book since you told me to and it just got delivered today. Will read asap

Originally posted by @Account Closed

so how do i know if its good NOI or not? Isnt cap rate basically the same thing as ROI?

Cap rate is rate of return based on the unleveraged purchase price that excludes transaction costs and cap ex. E.g. if the price is $1M and NOI is $100K, cap rate is 10%. Is it good or bad? It depends.

If market cap rates are 7% (i.e. other people are paying $1M to get $70K of NOI) but you can find a deal that produces $100K on $1M price (10% cap rate), it's a good deal. But what if market cap rate is 17%? Then your 10% is bad!

Neither NOI nor cap rates are static though. If current NOI is $70K and the market cap rate is 7%, you are expected to pay $1M for this property. However, if there is a way to increase that NOI to $140K, you are buying that property at a discount to its future value.

So, cap rate is only relevant when you sell to price your exit. It is almost useless when you buy because you ultimately pay what the seller agrees to and it may or may not reflect current cap rates. Your offer price should be based on the future value less your cost to get there and less your expected capital gain.

Oh, and your future value is calculated as future NOI divided by future cap rate

@Nick B. Thank you Nick, that helped a lot i appreciate it

Yes, as @Nick B. explained, but put another way, just pretend you are buying the property with cash, and no loans. The price you pay for the property in cash is what you use to calculate the cap rate.

That's actually what makes Cap Rates such a useful metric: they do not take into account one's financing sources, terms, or interest rates. This way, a cap rate of, say, 8% gives everyone instantly a decent idea of the property and it's cash flow potential. Cash buyers would actually experience those 8% returns. But any buyer who would borrow money to be able to afford the purchase will have to also pay to service that loan, that mortgage. So that person's realized returns will be less than the 8% the cap rate suggests. But still, the cap rate allows investors to communicate a lot about a property (on the surface) with each other. It's very useful in that general way. But again each individual investor will have his/her own sources of funding with different terms. So the cap rate allows us to compare properties without considering funding. It's still only surface info, though.

Jeff Jerma

I feel like you posted this deal last week...or someone did anyways because I remember running the numbers. This one isn’t a deal unless there is a solid value-add component.

Here’s why...the debt service with a 30 year $5.6m loan at 4% (which is probably overall better terms than most lenders will offer you) is $26k a month/320k a year. It’s break even. Also I think you’d have a EXTREMELY difficult time getting any bank to agree to lend when you have nothing in the deal.

That’s my assessment with what little information I have to go on.

Of course that all changes if you put 20-25% down and get a good 30 year amortization.

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