does cap rate include property taxes when calculating net income

In Buying Property - Asked by Stphen K. - Oct 25, 2012
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Answer(s)

Dean G.
Broker/Agent
Jacksonville, FL

The answer is within your question. Remember that you calculate the cap rate by dividing the NET operating income for the year divided by the Value of the Property. Property taxes are considered an Expense, and in order to derive the NET income you must subtract the expenses.
Potential Gross Income Minus Vacancy and Credit Loss Equals the Effective Gross Income!
Effective Gross Income minus the Operating Expenses (Insurance, Taxes, Exterior Maintenance, Etc) equals NET OPERATING INCOME. Taxes should be included in your operating expenses,

Oct 25, 2012
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Dan M.
Broker/Agent
Campbell, CA

Yes

Oct 26, 2012
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Glen W.
Lender/Mortgage Broker
Atlanta, GA

cap rate is the rate of return an investor requires on an investment. The property taxes are included in the NOI which is divided by the cap rate to help determine value

Oct 26, 2012
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Gary H.
Owner/Investor
Trabuco Canyon, CA

More than YES. You need to calculate what the future property tax will be after you buy a property and make sure the NOI is reduced by the amount you will have to pay. For example, in California, the property tax is based on the last purchase price plus a very small annual increment. So, for properties that have not sold for many (20) years, the property tax can easily double upon purchase. Further, on a NNN (Triple Net) deal on a fast food property, I was scammed by the real agent who delayed giving me a copy of the lease. A NNN deal means the tenant will pay the property tax, etc. But the lease anticipated the property tax going up upon a sale, so it had a ceiling on the amount the tenant would have to pay for the annual property tax! That meant the owner would have to pay the excess property tax out-of-pocket; every year! That little detail changed the property from a normal cap using the existing property tax amount to a negative NOI and therefore a negative cap rate for a buyer.

Oct 26, 2012
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Robert G.
Appraiser
East Hazel Crest, IL

There are times when the taxes are not included in the expenses, but are expressed as a percentage figure which is added to the cap rate...I generally refer to this has a "loaded" cap rate. This is common when appraising income producing properties for real estate tax tax appeals where the actual tax amount is in dispute

Oct 27, 2012
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Dalip S R.
Broker/Agent
Lumberton, TX

Yes, taxes and insurance should be included when calculating cap rate and net income.

Oct 27, 2012
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Chris R.
Broker/Agent
Denton, TX

Typically and generally yes. Generally a lease will stipulate what all is to be included and generally it will include on a true NNN lease - taxes, maintenance and operational expenses and insurance costs. Review the lease to ascertain specifics for that tenant and for the property and go forward accordingly.

Oct 31, 2012
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David P.
Appraiser
Boca Raton, FL

If the property you are looking at has leases which are gross leases, than the real estate taxes and insurance are a part of the operating expenses you would include to arrive at a net operating income which you would divide by the cap rate to yield a value of the property. If you find that the taxes are high or low and a change is expected, you can take your cap rate and load it with the tax millage rate within that particular tax district, a tax loading factor. Once you have arrived at a value you can then take the tax millage rate and multiply that times the indicated value to ascertain what the taxes possibly should be.

Dec 7, 2012
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sean g.
Broker/Agent
Manhattan Beach, CA

Yes, the capitalization rate is determined by dividing net operating income by the value of the subject property.
With smaller residential apartment buildings, GRM's (Gross Rent Multipliers) are more commonly used.

Mar 26, 2013
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