All Forum Posts by: Account Closed

1. To value NOI's of commercial buildings when the Rents are long term and some are above market and some are below market. If all rents were market like residential then you could use direct sales comparison method to value them.

2. & 3. Cap rates are not a profit metric. If you divide YOUR NOI by YOUR offer price you may be the worst buyer ever and overpay. If you KNOW what cap rate other properties were bought at then you know if you buy at a lower cap rate you probably PAID too much.

3.  If you are in the market you should have an idea of what market expenses are.  If you don't have experience you are at the mercy of the brokers, sellers, etc.

4.  Operating expenses are somewhat asset specific.. Basically you'll have taxes, insurance, maintenance and repairs, mgt., utilities, accounting, legal etc.

5. & 6.  Experience.  The price to rent ratio (2%) will fluctuate some with the market but generally stays pretty constant except in volatile markets.  I've pretty much bought in .7% PTR ratio markets so if a property/market is less than that I can assume the market is overheated since it stabilizes at .7% over 40+ years.

But YOU should be more concerned with the rent increases and appreciation.  What good is a 2% PTR ratio if there are not rent increases or appreciation.  In my .7% RTP appreciation is pretty predictable so every time I get $100,000 increase in property value I can count on a $700 rent increase.  See how .7% blows the doors off 2% ?

Kyle

1.  duplexes are not valued by cap rates.

2. Dividing your NOI by a possible/actual sales price means NOTHING

3. You have to have actual operating expenses to get NOI. You cannot take a percentage of gross rents and come up with NOI.

4.  You can't "pick and choose"  what operating expenses to use to calculate a cap rate.

5.  2% rule only works in 2% markets. 

6.  If your market is less, say a 1.5% rule that usually means the market thinks that area is more profitable and will pay more for the property.

There are not multiple cap rates.  There is only market cap rates.  That is calculated on closed sales of similar properties.  Your PGI would be at market rents and your expenses should be market.

If the property is not operating at market then you would calculate value as I outlined below in another thread, Also reserves are not an operating expense and is not a part of NOI.

Nope. it will ONLY change the value NOT the cap rate. Two exact same buildings have the POTENTIAL to gross $100,000 rents. Bob is a smart investor and operates to market and has a NOI of $60,000. Similar properties have sold at a 8% cap rate so if Bob sells he can expect to get about $750,000. Frank is lazy and stupid and his building is half empty and he is paying his brother in law too much for janitorial, repairs and maintenance and his NOI is only $20,000. At an 8% cap rate a novice seller would think his property is only valued at $250,000! Numbers don't lie. But Bob knows it will cost him about $100,000 to get the property up and running just like his identical property. Fire the BiL pay some leasing fees and a little maintenance. Now counting on the lost rents until he gets the property up and running he will only be out about $150,000. So Bob has a property capable of generating $60,000 NOI. At market cap rate of 8% the property is worth $750,000. But it will cost about $150,000 of elbow grease to get there. So Bob would buy the property at a 8% cap MINUS the costs to get there $150,000. So he pays $600,000. See? the cap rate is the same, the value changed.

Negativity?  You mean your -$50,000?  Who are you helping?  

I just demonstrated mathematically how your suggestion would lose money. What part do you think is way off?  I'll be happy to walk you through it so you will learn what you are doing wrong.

Real estate agents sell property. Appraisers do appraisals. A real estate agent can do a CMA But it is not an appraisal.

The $8,000 Is not part of NOI. It would be a below the line adjustment that would lower the purchase but have no effect on the cap rate.

waitaminnit.  X = ?

Nope. it will ONLY change the value NOT the cap rate. Two exact same buildings have the POTENTIAL to gross $100,000 rents. Bob is a smart investor and operates to market and has a NOI of $60,000. Similar properties have sold at a 8% cap rate so if Bob sells he can expect to get about $750,000. Frank is lazy and stupid and his building is half empty and he is paying his brother in law too much for janitorial, repairs and maintenance and his NOI is only $20,000. At an 8% cap rate a novice seller would think his property is only valued at $250,000! Numbers don't lie. But Bob knows it will cost him about $100,000 to get the property up and running just like his identical property. Fire the BiL pay some leasing fees and a little maintenance. Now counting on the lost rents until he gets the property up and running he will only be out about $150,000. So Bob has a property capable of generating $60,000 NOI. At market cap rate of 8% the property is worth $750,000. But it will cost about $150,000 of elbow grease to get there. So Bob would buy the property at a 8% cap MINUS the costs to get there $150,000. So he pays $600,000. See? the cap rate is the same, the value changed.

NOW if you want to argue that the property was only worth $250,000 have at it!

OK sure.  But that has nothing to do with cap rate and elbow grease.