Hi All, I have a question regarding determining potential Property value based on CAP Rate. I'm analyzing a property in Southern California that is a 60 unit apartment complex. It's currently 100% occupied and shows about $1.3m in annual income with an NOI of about $621k. Based off my research I was thinking NOI ($621k) divided by CAP Rate equals potential Property Value...if it's a 5 Cap location that equates to about $12m...the seller is asking $22m which to me seems the broker is dividing the Gross income by Cap Rate..any input to clarify would be great. Thank you in advance for everyone's input!
Orange County, CA.
You would have to get a fairly accurate cap rate of the local market for comparable apartment complexes. How did you come up with 5% cap rate? Did you consult the local commercial brokers, property managers, commercial investors, etc. who are familiar with the local market of similar properties?
$22m for $621k of NOI works out to be 2.82% Cap... Isn't that par for the course in the crazy bubbly southern cal market? :-)
Thank you for the reply. I just started reviewing the material today and have not consulted with anyone regarding the Cap Rate, however I do know the location would most likely fall in that range...I came up with the higher 2% cap rate as well, that’s why I wanted to make sure I wasn’t calculating incorrectly...I’m guessing the other $10m is an additional premium for location in Southern CA...lol
Crazy thing about cap rate compression... a 1% drop in CA can be as much as 30% bump in value but only 10% bump in the midwest.
On the other hand, 2.82% cap rate can be quite attractive in a negative interest rate environment... :-)
Agree! Thanks for sharing Immanuel