Assessing Commercial multi-unit properties

1 Reply

Can someone explain this to me. I feel like I’m getting something foundationally wrong. From my understanding, a properties value is NOI/cap rate. Is this correct? What I’m not understanding is, it seems like the higher my NOI the less the property is worth.. Let me break it down with an example: NOI:$10,000 Purchase Price: $100,000 CAP rate: 10k/100k = 10% Value of the property: will obviously be what I paid for it then... 10k x .1 =100k If I raise my NOI, my cap rate goes up, and the value goes down... So if I just arbitrarily offer them 500k for the above property, my cap rate goes down but my value goes up even though it’s still not a nice property? But it’s value is higher? That’s what doesn’t make sense to me. How do you figure out what the property is valued at so you don’t over pay? Property 1: NOI: 10k Purchase Price: 100k Cap rate: 10% Value of Property: 100k Property 2: NOI: 10k Purchase Price: 500k Cap rate: 2% Value of property: 500k Or do you not find the property value by dividing NOI by cap rate? Idk if I’m making sense here? I’m basing it off of this article: https://www.biggerpockets.com/renewsblog/property-values-residential-commercial-investing-and-matters/ What am I doing wrong? This is a cyclical nightmare in my head right now that I’m trying to straighten out. Lol Thanks y’all!

@Jason Henry-Ruhl

...This is a cyclical nightmare in my head...

Yep. You're chasing your own tail. You got the formula correct, but the "cap rate" should be the cap rate of comparable properties that have recently sold in the local market. Sometimes this cap rate is referred to as market cap rate. You don't calculate this rate, you find this rate by speaking to commercial brokers in the area as they would have this information. Again, you calculate the value of the property you're analyzing by taking the verified NOI of the previous 12 months and then divide that by the MARKET cap rate. So you do not use the cap rate of the property you are analyzing... this is what led you to chase your own tail (or cyclical nightmare, as you put it).

As far as the article that you referred to, well... you need to read the articles on BP with a grain of salt. Some of the authors of BP articles should not be considered an authority on the subject, sad but it's a fact. I always read BP articles with a grain of salt... on some articles I have to add tequila... LOL

Cheers... Immanuel

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