Include Property Mgmt fee in Cap Rate calculations?

[Andrea Hauserman]

I'm selling a package of 8 duplexes. According to my research a pure Cap Rate does not include property management expense. Haven't used a property manager, however all repair and maintenance expense has been included. Would you include a Pro Forma Prop Mgmt expense in your calculations?

Also the markets have moved a lot in the last year. What used to sell for a 12-13 Cap is now a 7 to 9.  Loopnet even has a local 12 unit building offered at 5.7 right now.

How are buyers viewing this? Obviously if your other choice is 2% in a bond it may be a preferable investment if the building has been well maintained - at least IMO. Are you finding larger B deals where you can make in the teens? I'm not - in Cleveland OH area. I can find it in SFR's in the lower rated school districts, otherwise it's tough. Even my small town investments have moved up.

If anyone  can answer my question about including Prop Mgmt expense in Cap Rate calculation I'd appreciate it.

[Omar Khan]

@Andrea Hauserman Technically, property management fees are included in calculating NOI. Any semi-serious investor will include them even if you omit them in your calculation (not saying you should omit them).

I wouldn't go off the advertised cap rates. As you yourself have seen, different people include (or exclude) different things when calculating cap rates. I would take both comparables and income valuations (cap rate) into consideration. At the end of the day, regardless of how great your property is most buyers will still base their decisions off comparables. Hence, it's best to have that information readily available. 

Furthermore, the cap rate is only a measure of unlevered return. Investors also assume that property prices rise and debt is paid down - another way of increasing overall equity over time which is not just a measure of prices.