Understanding Pro Forma Cap Rate - Using Rental Property Calc.

[Jeffrey Gonano]

I'm having a hard time understanding the Pro Forma Cap Rate in the Rental Property Calculator.  I have a property that I'm looking at and the pro forma cap rate comes out to about 8.26% with my after repair value at $145,000.00.  I was curious what would happen to my pro forma cap rate if i changed the after repair value to $160,000.00 and the pro forma cap rate did the opposite of what i thought it would and went down to 7.48%.  I always thought a higher cap rate was better.  Does this not apply to the pro forma cap rate?

Thanks in advance 

[Bernie Huckestein]

The Cap rate is a function of your net income and property value. If you change the ARV up but the NOI is the same the cap rate would go down. (And yes the higher the better). Here is a CAP rate formula which will show why the number goes down for you

CAP Rate = NOI / ARV or if you know the CAP rate you want:

Offer price = NOI / CAP rate

Hope this helps

Bernie