CAP Rate calculation

19 Replies

Can you guys and gals help me check out my CAP rate calculation and tell me if there is any thing I have forgotten?

Cap Rate is Net Operating Income divided by Property Cost or Value.

Net Operating Income=
+Revenue generated
- Operating Expenses

INCOME is just the Rent $990/month

EXPENSES are:
HOA fee (WSG). = $240/mo
Property TAX. = $88/mo (1056/12)
Hazard Insurance. = $ 18/mo (210/12)
Maintenance + Repairs = $ 17/mo (600/36)
Total Operating Expenses = $ 363 / mo

+Revenue generated = $990 / mo
- Operating Expenses = $363 / mo
Net Operating Income= $627 / mo

ANNUAL NOI -- (627 X 12) = $7,524

PROPERTY COST WAS 119,500

7524/119500=0.0629

So the Cap Rate is 6.3% ?

Or should I be using the current market value instead of the cost of the property?

Thank you.

Charles

I think cap rate refers to the market values of the property and a way of comparing one geographic area vs. another . IE cap rates in New York are much lower than cap rates in Atlanta.

But your calculation is pretty much yield - You could do the same for any fixed income investment. Seems like a decent way to evaluate an investment. If you can get a loan at less than that yield, you should be good.

Cap rate is based on the price of the property.

Your math is correct however you are leaving out a number of items.  What about management fee, vacancy rate, turnover cost etc.? I suspect your repairs and maintenance number is low unless it is a very new property.

You may say that you are going to manage it yourself however that is false logic. Yes managing yourself is a legitimate choice. no one will watch over your property was well as you can. Managing your self also means you take in more money net. However Cap rate is a measure of how (your investment in) the BUILDING is performing. If you are managing the property, your efforts are generating part of the income. Your investment in the building isn't generating that money, you are.

(I edited this by adding the words "your investment in". Bob Bowling's post reminds me that is a more accurate description.)

Um, let's assume you can accurately calculate the NOI and say it is $10,000. If you buy it at $100,000 you bought at a 10% cap rate. If you pay $125,000 then you bought at an 8% cap rate.

See how all that figuring has provided ABSOLUTELY no information?  

Your NOI is understated. The HOA includes capex which is not an operating expense.

You are wasting your time.

Thanks guys. This is just one unit so I guess Cap Rate is usually used for entire buildings. Plus the HOA including capex items is throwing a wrench in the calculation anyways. Appreciate your inputs. Have a wonderful evening.
Charles David
(360) 969 5202

So, for someone who already owns a property, as I do, and have made it into a rental, would I use purchase price plus capital improvements I have made over 15 years, for cost? there are no mortgage expenses anymore....worst expense is our property taxes are very high, about $7,200 per year.

I paid 335,000 but participated in a retrofit with the other owners at 40k, plus remodeling of approx $50,000.for money expended of 425,000. my conservative NOI is 25,000 per year, with rents of $37,000 in a competitive market. I rarely have a vacancy of more than a day.

I hadn't planned on converting to a rental going in....but how do my numbers look, from an investment standpoint?   

Originally posted by @Robert M. :

Agree with Ned, also your M&R seems extremely low. It is normally budgeted at 10% of rent.

With my rent over 3k, and the median for the area actually higher, the 10% rule would put my M&R at 300 a month, which would be too high. our HOA also covers some items

also, I have been considering the rule that rent should be 1% of purchase price wouldn't work for most folks, since a SFH median is 650k....and they aren't renting for $6500. maybe .05 or .08 is closer.

so much depends on the market too

Originally posted by @Kim T.:

So, for someone who already owns a property, as I do, and have made it into a rental, would I use purchase price plus capital improvements I have made over 15 years, for cost? there are no mortgage expenses anymore....worst expense is our property taxes are very high, about $7,200 per year.

I paid 335,000 but participated in a retrofit with the other owners at 40k, plus remodeling of approx $50,000.for money expended of 425,000. my conservative NOI is 25,000 per year, with rents of $37,000 in a competitive market. I rarely have a vacancy of more than a day.

I hadn't planned on converting to a rental going in....but how do my numbers look, from an investment standpoint?   

 Anyone have input on the value of this going forward, as a real estate investment? 

Obviously I was an accidental landlord, but from my limited experience and knowledge, it seems to be ok. 

obviously the purchase cost and taxes are higher than I'd choose if I was looking for a rental going in.

Originally posted by @Kim T. :

If you are trying to measure how the investment has performed during the last 15 years, you may want to use the internal rate of return (IRR).

To get the current cap rate of the investment you would use the market value of the investment today (what an investor would pay for it) and whatever the net income is to compute that. 

Regarding there not being a mortgage on the unit, that wouldn't affect the cap rate.

@Kim T. ROE - return on equity may be a better measure for you. Your annual cash-flow/equity. Your cost basis is $425,000 it looks like. FMV may be $625k? Your equity would be close to FMV - 10% for sales expenses since you aren't carrying a mortgage. Ball-park numbers would be annual conservative CF of $25,000/$562,500 = roughly 4%. Is it possible to yield more than about 4% on $562,000 of equity? I would think so!

Another big item I would consider is taxes.  As a primary residence for 15 yrs, all gains on a sale should be tax free.  If you rent it out for more than 36 months, it's no longer tax-free.  Something I would definitely keep in mind!    

Originally posted by @Rebecca Holmes:

Someone in this community had a cap rate calculator (it was an Excel formulated workbook). 

It was so easy to use and I've lost it.  Did anyone else see that post or is anyone willing to share theirs? 

Why do you want to do this calculation on a property that you have bought? 

Originally posted by @Bob Bowling:
Originally posted by @Rebecca Holmes:

Someone in this community had a cap rate calculator (it was an Excel formulated workbook). 

It was so easy to use and I've lost it.  Did anyone else see that post or is anyone willing to share theirs? 

Why do you want to do this calculation on a property that you have bought? 

 I'm not sure where I indicated it was for a property I had purchased already but apologies for the confusion. I used it during our property evaluation phase (prior to purchase).

Originally posted by @Rebecca Holmes:
b. I used it during our property evaluation phase (prior to purchase).

Why? If you know the market cap rate then if it is say 7.5% then you make your evaluations based on each properties NOI/7.5%. If the seller doesn't want to sell for market or your negotiated lower than market then move on to the next property.

You are wasting time trying to calculate a cap rate on POSSIBLE purchase prices.

Originally posted by @Bob Bowling:
Originally posted by @Rebecca Holmes:
b. I used it during our property evaluation phase (prior to purchase).

Why? If you know the market cap rate then if it is say 7.5% then you make your evaluations based on each properties NOI/7.5%. If the seller doesn't want to sell for market or your negotiated lower than market then move on to the next property.

You are wasting time trying to calculate a cap rate on POSSIBLE purchase prices.

I agree with you Bob...I don't like to waste time either or spend too long evaluating leads...that's why I liked that CAP calculator someone posted. It took only a couple seconds to calculate. I will continue my search but until then, I will consider using your formula as well.

Cap rates are what corporate investors look at before considering to purchase a potential property. 

They usually do not have a good grasp on things like how good or bad the neighborhood is or what kind of tenants you will be dealing with, nor do they care. They use cap rate because they are considering hundreds of properties and this is a fast way to focus on money makers.  

If you are small time investor there are other indicators like NOI or IRR that will be much more useful.