Cap rate is useful to submit your bids to buy properties. The higher the cap rate the higher return you are getting from the investment. You want a higher cap rate...I use a rate of 8% and above for a good investment.
NOI= Net operating Income of the property (use only the "actual" income produced and expenses not the info the brokers give.)
Cap Rate is = to the NOI divided by the offer price. The offer to give is just the flip of the equation, NOI divided by what Cap rate you want. Ex. Investment produces $1.8M per year, after expenses there is a net profit of 235K/yr. What is the Cap rate?...
NOI/1.8M *100%=13.05% Cap Rate, this means it will pay for itself in 7.7yrs (100/13=7.69)
The actual value of the investment is determined by comparables in the neighborhood..if none then you can give a low and high offer just based on the Cap Rate.
It is a decent price to offer 8% Cap Rate...so offer is NOI/Cap Rate= 235K/8%=2.937M Value
A lower Cap Rate(6.5%) produces a higher asking Value...235k/6.5%=3..615M
A higher Cap Rate(10.0%) produces a lower asking value....235K/10%=2.35M..this pays for itself in 10 yrs!
So you need to determine what Cap Rate you want ...then get a high and low offer by using an Increase of 1% and a Decrease of 1% for your High and Low offers. Hope that helps!
Oct 7, 2011