Formula For Analyzing Properties

Hello everyone,
What is the mathmatical formula (cap etc) & some key strategic factors when analyzing first time multi-family property?
thank you & happy holidays!
In Buying Property - Asked by lara n. - Dec 30, 2011
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Answer(s)

Sheri Dawn P.
Broker/Agent
Wichita, KS

Seasons Greetings Lara -
There are a few different ways that Returns on Investments are factored. Cash on Cash is the annual rate of return for the cash it takes out of your pocket to buy divided by the net profit at the end of the year. Cap rate is based on the rate of annual net profit before debt and taxes divided by the purchase price. This is the same for Multi-family, industrial, office buildings or retail property

Dec 30, 2011
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Ron M.
Broker/Agent
San Jose del Cabo, BS

"Cap rate is based on the rate of annual net profit before debt and taxes divided by the purchase price". This is the same for Multi-family, industrial, office buildings or retail property.
However, if you are calculating the cap rate from a statement of an operating business or income
producing property, it is then "before debt service, taxes, principles (owners) income, depreciation (amortization), divided by the purchase price.
Then, do a little research and find what is an acceptable cap rate for a similar type of business or
property. It is no different than doing comp's.

Jan 2, 2012
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davoud p.
Los Angeles, CA

I think, it is a easy way to find out the Cap Rate.
1) You need to find out exactly, amount of money a building bring in, in a month; multiply by 12.
2) You need exactly find out how much expenses are? for example mortgage, taxes, who pays utilities? expenses? add all together, don't let lose!
3) Use your brain and "money come in - money goes out= whatever number is divided by sale price.
4) For example, you want to buy a building for a 1.5 milion dollars.
5) then you like to rent it out. 1.5 milion dollars in Cd-saving account in a bank , may be give you 1% retun. no headache! Your money saved!

Jan 2, 2012
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Philip E.
Broker/Agent
Dedham, MA

I analyze investment properties using 4 methods:
1) Gross Rent Multiplier (GRM) – a very simple “drive by” calculation that shows you the relationship between the property price and gross income (price divided by gross annual rents); this is nowhere near as good as the Cap Rate but it is very quick to calculate
2) Cap Rate – net operating income (NOI) divided by price; the NOI excludes financing, depreciation and taxes
3) Cash on Cash Return – net cash before taxes divided by price; net cash does not include property appreciation
4) Return on Investment – I calculate both Compound Annual Growth Rate (CAGR) and Internal Rate of Return (IRR); both the CAGR and IRR take into account financing, depreciation and taxes
GRM and Cap Rate are excellent for analyzing properties and comparing them to each other. Cash on Cash and ROI are used when comparing to other investments since one needs to know investor tax rates & borrowing costs.

Jan 18, 2012
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