My CAP Rate is WHAT?

[Christos Philippou]

Hey everybody, noobie here again. I have been reading like crazy and like everything, there seem to be 100 different discussions, opinions and thoughts about everything in this business.

I have been reading about CAP rates and read in some places to forget it, don't worry about it, it's not important. Other places say us as investors NEED to know our CAP rates and must know the numbers down to a T.

That being said, can somebody help me out here? These numbers/CAP rate just doesn't seem right for some reason. Most CAP rates I see around the MLS and other listings range from 5%-15%. The way I calculated mine, it's like 20-30%? Is that right or am I missing something big?

I purchased a 4-banger for $110,000. It brings in $2,590 a month, so $31,080 for the year.

My year expenses include: $3,000 for gas and water bills, $750 for insurance or so, $1,500 for property tax, and estimate $3,000 for repairs (probably a big over-estimation). TOTAL: $8,250.

My NOI should be $22,830 based off these numbers, unless I am missing something big here.

If I purchased the place for $110,000 and my NOI is ^^^... my CAP Rate is about 21%.

**** TL/DR: if my Cap Rate is 21%, could that mean I got a steal on the purchase price, and my property is actually worth significantly more than $110,000? ****

THANKS!

[Account Closed]

Originally posted by @Jeffrey H.:

Capitalization rates only reflect how a business is performing under the current management.  

If you can increase revenue and decrease expenses after taking over then your capitalization rate will increase.  If you keep operations the exact same then the cap rate will not change.  If you mismanage the property and revenue goes down and expenses go up then the cap rate goes down and the business is less valuable.

Where is your expense line items for vacancy (10%), management (5%), and capital improvements (5%)?  Any office supplies, lawn service, attorney fees (when you evict someone), etc?

The cap rate is made by the market. Increasing NOI increases value NOT the cap rate. A vacant building will sell for it's market potential based on current rents. vacancy and cao rate etc LESS the costs to get there.