All Forum Posts by: Account Closed

No, cash flow is the money left over after all necessary expenses are paid each month. Cap rate is the rate at which investors are paying for a commercial property's NOI.

There are no cap rates on SFR's.

Benjamin no worries, here's a response I got in another thread, " - I love the response! Thanks for being candid."  

Some people have not been so nice.  I'm not trying to be a jerk but to give you an answer that makes sense.  I have no problem with someone challenging that.  Is says good about you that you didn't leave in an ignorant huff!  LOL

Now if your $732,200 NOI is selling for $14,000,000 on the open market then that means that the market cap rate IS 5.23%. Now you are not selling cap rates you are selling NOI. As a buyer I would want to see you telling me that similar properties have sold for 5.23% market caps. I can do the math. That means the property is worth $732,200/.0523= $14,000,000. You are offering it at $12,500,000. I'm not going to be calculating a fake cap rate, I'm going to be calculating my $1,500,000 savings. I can spend that. Can't spend a cap rate.

Now that I have purchased from you at $12,500,000 a CAP RATE will be calculated on that sale. $732,200/$12,500,000= 5.85% cap rate on your sale. The market will want to use your sale as a cap rate comp for their next purchase. Let's say there is a $1,000,000 NOI for sale. The old market cap rate would value it at $18,797,000. But buyers will argue that the market is moving down based on your sale and want to offer $1,000,000/.0585= $17,094,000 ! $1,700,000 difference.

Now it is up to the market to determine which value is correct.  People in the know will say the property SHOULD have sold for $14,000,000 but the seller needed a quick sale/didn't want it to be on the open market for various reasons/had some issues that may or may not affect the value but the seller did not want to litigate them and was willing to discount to not have to deal with it/etc.  If the next sale happens at 5.23% cap rate then the market will exclude your purchase cap rate as not being market just like you would not use a comp on a house sold below market between family members. 

 Benjamin, here is what you initially posted, "They would sell it for $12.5 Million but the deal still works out to be a 5.23% cap rate at $14 Million"

See you are just throwing numbers out there.  Where did the $14,000,000 come from?  $12,500,000?  Are you saying someone is going to give me a $1,500,000 discount just because I found this on the internet? 

Now the thing is that the cap rate is created by the market.  It does not change because you change your asking price.  If the $732,200 is the NOI and the market is buying that at a 10% cap rate then the property is worth $7,322,000!  Your fake numbers mean nothing unless somebody stupid with money comes along.  Psst, don't hold your breath.  That is how you are wrong.

You do NOT calculate a cap rate on a property that has NOT closed. You get the cap rate from closed sales of similar properties. So if they all sold for about an 8% cap rate then your $20,000 NOI is worth about $250,000.

You are wasting your time trying to figure what the seller will sell to you for and then figuring a cap rate based on that guess. So let's say you are a novice and think incorrectly that you should waste your time on what ifs. If the seller in this case is asking $300,000 for this $20,000 NOI you calculate a 6.67% cap rate. THAT TELLS YOU NOTHING! You are wasting time. Stop it!

Fair question.  First you are incorrect in assuming the property is worth only $250,000.  You probably got that idea from the majority of posters here that have never done a deal and have no real experience and some guru spouted this Info.

Let's look at it from the market's perspective. Our two identical buildings and a third owned by Bob next door that is a fifth the size of the first two that produces $20,000 NOI at market. At 8% cap rate that property is valued at $250,000. But there is no upside. Should it and the property capable of generating $100,000 NOI sell for the same amount? Of course not. The market is going to see Frank's place as a $750,000 asset. But it has issues. And Frank is lazy not stupid.

So Neil wants to pay only $250,000 for this.  But Ben comes in and underwrites this at $500,000 because he knows the $150,000 to get it to market only consists of $70,000 hard costs and the $80,000 is his reward for taking the risk and for his time.  He wants the extra $50,000 because he's a nice guy and he is worth it.  Now Brian is in the market also and he has a crew sitting around waiting for the next project and his leasing team is telling him they are getting calls everyday for space in a good property.  Brian looks at the property and knows he can fix the property for $50,000 because he Is his own contractor and He knows he can lease up within a month of repairs so he has $20,000 less rent loss than Ben would have. So Frank has Ben's $500,000  offer, Neil's $250,000 offer and Brian's $600,000 offer.  Now Brian will only spend $110,000 So he is getting a $750,000 property for $710,000.  Who will Frank sell to?

Another way to look at this is if Bob builds another identical property next door.  As it is completed Mrs. Bob files for divorce and court orders her half.  What is the value of the empty building?  Bob goes before Judge Neil and tells him he will give up half of the $750,000 building and keep the worthless new building.  What's your verdict?

Aloha Jon

https://www.biggerpockets.com/forums/223/topics/21...

What @Brian Burke failed to mention is that Haoles are considered a delicacy  to the Hawaiian cannibals.  I thought you were coming last year on a $20,000 vacation.  Did I miss you?

Yes.

How is that mathetically possible?

 What is the rent status?  Has she paid July and August?  What are your chances of collecting rents and your legal fees?