Rental Property Investor · Southern NH · Member since 2019 · 8 posts · 0 votes
7y
The analysis gave 2 cap rates: a pro-forma cap rate of 2280 and a purchase cap rate of 2180. Not sure what the real-life difference is between them, what they really mean and how it is applicable. I averaged the 2 for the discussion.
Investor · North Richland Hills, TX · Member since 2013 · 1k+ posts · 1k+ votes
7y
Cap rate is a rate of return on an all-cash purchase (no debt). It is calculated as NOI divided by price and expressed as percentage. E.g., if NOI is $50K and the price is $500K, the cap rate is 10%.
Investor · North Richland Hills, TX · Member since 2013 · 1k+ posts · 1k+ votes
7y
So, you have two cap rates produced by the tool: 8.26% and 8.64%
It is not clear what NOI and price they are based on but regardless of that, both numbers are irrelevant for valuation purpose. What you you need is a market cap rate for this property class and location. It is the cap rate derived from the sales of multiple properties over relatively short period of time. This would be somewhat similar concept to price per sqft in the SFH world.
MF brokers can supply that number but let's say it is 8%, for example.
In that case, your current value is $235,450 ($18,836 NOI / 8% cap rate).
Your future value is based on a future NOI (however you plan to grow it) and future cap rate. If you plan to sell in 5 years, the future cap rate should be set at least 8.5% (current 8% + .1% for each year). On a 10-years hold, the future cap rate should be assumed at 9%. These are all assumptions as nobody knows what future cap rates may be.
Rental Property Investor · Southern NH · Member since 2019 · 8 posts · 0 votes
7y
Thank you for the explanation as I had seen posts that cap rate is irrelevant except for commercial properties. Unfortunatley there were only 2 MF sales in past 6 mos (small, rural town). Those had pointed me toward offering 130ish whereas seller wants 165.