BP Calculators: Pro Forma Cap Rate vs Purchase Cap Rate?

[Allen S.]

Hello everyone... calculator question here:

I have been trying to figure out the difference between the Pro Forma Cap Rate and the Purchase Cap Rate on the calculators and the only difference I can see is in how financing is handled:

Purchase Cap Rate - treats the deal as if it were a cash purchase, and ignores any financing

Pro Forma Cap Rate - uses the P&I payment as an expense, lowering the cap rate from the Purchase Cap Rate

Is this correct?  Am I missing something?

-Allen

[Kevin Dougherty]

Purchase Cap Rate is the in place income and expense numbers for what the investment brings in today or at time of purchase and Pro Forma Cap Rate is looking at "Potential" return on the investment based on future income and expenses that may or may not occur. Sellers like to sell the Pro Forma Cap Rate Value but as a Buyer, you, your investors and your lenders look at the Purchase Cap Rates to make their decisions.