what exactly goes into evaluating caprate

Question

I’m looking at a 7 unit building . does the vacancy rate and repairs go into evaluating the cap rate , or is it just income versus debt ?

TY !

Barry Ruby · Answer

@Marci Stein .5 = 50% .05= 5.0% so the cap rate in your example is a bit more than 5%

Will Pieper · Answer

It should but if you are seeing a marketed cap rate, sometimes they like to fudge the numbers. Your payment and interest is typically not included.

The best way to evaluate is 1. Find a realtor that is familiar with this type of investment. 2. Ask for a rent roll and Trailing 12 which is the last 12 months of all expenses and income associated with the property. With this small of a property they may not keep that but you should at least try to figure out what capital improvements (CAP Ex) has been done and do research to try to come up with an operating expense. 3. Take all of the expenses for the year, stuff like: Vacancy, maintenance and repairs, management, concessions, insurance, taxes, and any utilities the landlord pays, and subtract that from the annual income. That is your Net Operating Income or NOI. Now take that number and divide it by the asking price. This is your CAP rate. There may be more expenses and there can also be additional income like laundry or parking so keep these in mind. Best to work with someone who has experience with this type of property in that area to ensure you are evaluating it correctly. Good luck!

Marci Stein · Answer

So the cap rate is not even 1 percent- merely .5?

Barry Ruby · Answer

@Marci Stein Marci, the cap rate is correct if the NOI is accurate. It also represents the buyer’s

un-levered (before debt service) acquisition cap rate.

Marci Stein · Answer

Asking price is 875,000 k

NOI is 47,220

Cap rate  0.0539 ???

Makes no sence.what did i do wtong?

Austin Johnson · Answer

everything Will just said is spot on. I wanted to throw a comment in, when you're looking at their T12 notice if they have insurance, lol. I was showing an 11 unit the other day and the numbers seemed good. Then I noticed the seller doesn't pay for insurance. maximize cash flow I guess! needless to say this changed the real cap rate.

what exactly goes into evaluating caprate

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