CAP Rate or Comps

[Amir B.]

Hello BP Community,

This question is for the savvy REI's out there. When determining what is a great investment, what is the best way to go about it?

here is an example of a property for sale in my area:

Duplex

809 N Hobson Ave, West Sacramento, CA 95605 

Listing Price: $348,800

Current rents: $925

GAI: $22,200

What is the best way to determine the CAP rate? I like to use 8%. Just wondering how you guys do it?

Thanks

[Jered Sturm]

You're missing some pieces to the equation: 

Cap rate= Net operating income / Purchase price

So for your example

Cap Rate= NOI / 348,800 (This is IF you bought it at list price)

One step further 

Industry standard says that NOI is typically 50% of Gross income on the property (this will vary by property). For your example this means $22,200 X .5 = $11,100. Using this assumption we get...

Cap Rate= $11,100 / $348,800

Cap Rate= 3.2

Market cap rates are simply the returns investors are willing to take within that market for comparable assets. 

With all that being said you would not value a duplex using cap rate. You would would value a duplex using comparable sale in the area. 

I hope I understood your question correctly and my answer helped. Feel free to reach out If I can be of help.