Originally posted by @J Scott:
Originally posted by @Account Closed:
Originally posted by @J Scott:
Looks like total income when fully occupied is about $78K. Based on the expenses you've listed, and adding in reasonable vacancy and capex costs, you're looking at about 50% expense ratio (including vacancy and capex), putting your NOI at about $36-40K.
If there were no deferred maintenance and if you wanted about 10% return, then the property should be worth about $360-400K to you. Of course, you may want a higher or lower return and there might be deferred maintenance (which should be reduced from your purchase offer) -- based on that math, you can come up with your own number to meet your goals.
1. NOI is not a percentage of gross rents. [/quote]
Any two rational numbers can be expressed as a ratio/percentage -- in fact, that's the definition of a rational number. In this case, if:
x = NOI + Capex + Vacancy
y = Gross Rents
Then x/y defines NOI + Capex + Vacancy as a percentage of Gross Rents.
In my example, above, Gross Rents was estimated at about $78K (65K/month) and NOI + Capex + vacancy was estimated at about $36-40K (based on the numbers that the OP presented and some assumptions. So, the NOI + Capex + Vacancy as a percentage of Gross Rents would equal about:
$38K / $78K,
Which is around 49%. I rounded to 50% for simplicity. Sorry if that confused you.
For more information, I would recommend any 5th grade math textbook.
2. Capex is not an operating expense and should not be included in a NOI calculation.
Correct. And neither is vacancy, by the way. That's why I always include them separately, as I did above. That said, grouping NOI, capex and vacancy is an easy way to determine the total cost of ownership (not including taxes and depreciation) as a percentage of Gross Rents. In my experience, this is a valuable measure for doing analysis.
Correct. That's why I didn't try to place a value on the property. I did say what the property might be worth to the OP, based on his desired return. But, I didn't have enough information to provide an objective value, which is why I didn't provide one.
1. You stated earlier, "putting your NOI at about $36-40K." You are changing your statement.
2. Also you stated, " x = NOI + Capex + Vacancy" When starting with gross rents the vacancy IS a part of the NOI calculation. Using this incorrect formula ends up counting vacancy TWICE!
3. Then you stated, "If there were no deferred maintenance and if you wanted about 10% return, then the property should be worth about $360-400K to you. Of course, you may want a higher or lower return an d there might be deferred maintenance (which should be reduced from your purchase offer) -- based on that math, you can come up with your own number to meet your goals."
How would he MEET his goals using this mess of calculations that could well end up with him overpaying for the property just because incorrectly using made up numbers come up with some senseless "worth"?
Three for three.
