What is the formula to determine the cap rate on 1-4 units?

Let us say income is $2600 a month collected from all for units together. Let us say For Sale Price may be $450,000.
In Selling Property - Asked by Saundra Lee A. - Nov 28, 2010
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Answer(s)

David D.
Broker/Agent
Miami, FL

NOI DIVIDED BY SALES PRICE

Nov 29, 2010
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Rob B.
Chandler, AZ

Saundra.....
David D indeed provided the proper formula. However, it may be misleading to you, since you have to deduct operating expenses from your gross collected income. These are likely to be 30%-40% of your income for 1-4 units. Let's be very conservative and say 25%. Thus, your $2,600 would be reduced to $1,950 per month average x 12 months for an NOI of $23,400. Consequently at a sales price of $450,000 you would have a 5.2%. I hope this helps....
Good luck Saundra....
Rob Baird, CA RE License #544165 (One of the oldest, active licenses in CA) 951 515-5855 Email: rob@capratecommercial.com

Nov 30, 2010
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Michael J.
Fort Lauderdale, FL

In the scenario you provided you'd be more interested in the Gross Income Multiplier. Rob B is correct. I would assume at least a 35% OPEX ratio (25% would be fairly aggressive), additionally please factor in a vacancy rate (i'd say 10%) as you are likely to have some vacant units here and there between tenants. lets do the math: $2,600x12x90%x65%=$18,252 NOI/$450k sales price= 4.06% cap rate. That is NOT a feasible deal unless there are some SERIOUS additional factors adding value to the property.

Nov 30, 2010
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Richard F.
Broker/Agent
Oceanside, CA

I have found that for 1-4 units most lenders use COMPS, not a cap rate, and certainly NEVER one for an SFR or duplex. Rarely on 3 & 4 units. Vacancy is 5-10% depending on the area and at least 25% of Expense ratio. Good luck to you.

Dec 1, 2010
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Leah H.
Broker/Agent
Hopkins, SC

6.9333333%

Dec 7, 2010
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Jeremy C.
Broker/Agent
Andover, MA

The formula to determine the cap rate on 1-4 units is no different than any other property. I wrote a free cap rate profits report to help answer this question. Check it out.

Jul 10, 2011
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