how do you calculate CAP

In Selling Property - Asked by Rosa L. - Sep 30, 2010
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Answer(s)

Michael K.
Owner/Investor
Fort Lauderdale, FL

NOI/Price x 100%= Cap Rate
NOI is accounting profit plus depreciation minus interest expense.
Best,
Angry Hobo

Oct 1, 2010
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Gregory G.
Broker/Agent
San Francisco, CA

Divide NOI by price.
NOI/Price

Oct 1, 2010
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Kenny A.
Broker/Agent
Tampa, FL

The Captalization rate of a property is the return received if purchased with all cash. The NOI is devided by a Purchase Price to determine the Cap rate.
EX: $100,000 rental Home, Nets $8,000 annually after expenses
8,000/100,000 = 0.08 = 8% CAP Rate

Oct 1, 2010
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Ron S.
Broker/Agent
Manitou Springs, CO

REMEMBER the name IRV WHEN NEEDING CAP RATE INFO. FORMULA IS I(NOI) OVER R(RATE)/ V(VALUE). IF YOU WANT TO KNOW ANY OF THE 3, COVER IT AND DO FORMULA.
I.E. WANT TO KNOW THE NOI, FORMULA SAYS RATE X VALUE.
RON SPRAGGINS, CCIM SENIOR CCIM INSTRUCTOR FOR 13 YEARS IN TWO COURSES.

Oct 1, 2010
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Brad F.
Broker/Agent
Redlands, CA

Calculating Cap Rate is Simple: Net Operating Income (NOI) Divided by Purchase Price
However, the key to a true Cap Rate is getting to a true NOI. First a Vacancy Factor must be subtracted from the Gross Rental Income. Then All operating expenses must be deducted. The list of potential expenses is too long to list here, but there are a few common mistakes made in determining NOI.
Those primary mistakes are "NOT" including management fees. Investors that manage their own properties are most likely to miss this. Also, I see a lot of calculations that use the "OLD" taxes and insurance, instead of calculating them on the new prospective purchase price.

Oct 4, 2010
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Dale O.
Owner/Investor
Spanaway, WA

There are 2 ways to look at a CAP:
1. From the Seller's view: CAP = NOI/Price: Seller pads the income and lowers expenses causing a false CAP.
2. From the Buyer's view: CAP = NOI/Price: Buyer uses real income and real expenses with a few additions for vacancy & collections creating a low CAP rate.
This is the point of contention. Buyer wants a certain CAP and uses his numbers to haggle for a lower price. Seller meanwhile is using his numbers to try for the highest price possible. The numbers can be moved around and justified both ways.
3. From the Commercial Broker's view: CAP = NOI/Price: The commercial Brokers will use proforma numbers showing 100% occupied numbers with low expenses making the deal look really good.
As an investor, you need to make sure you get the real numbers for both the income and expenses. There is one company that the numbers are always blown so far out of proportion that I do not even look ath their "proforma" numbers. I start from scratch and verify all numbers against the leases and invoices. Then you can do your evaluation of the property.

Oct 7, 2010
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Marty H.
Broker/Agent
Lenexa, KS

Lots of good responses about the calculation of Cap Rates. However, keep in mind that a Cap Rate is just a quick means of comparing investment opportunities.....and it's probably most meaningful to "all cash" buyers. Once an investor brings financing into the picture he or she should look close at Cash on Cash Returns, Internal Rate of Return and other analysis techniques that take into consideration the financing aspects of the investment. In other words, two different investors will likely have different returns on their investment due to their different approaches to financing the acquisition.
Marty Hugo
Real Estate Dynamics, Inc.
Mission, KS

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

There's a free cap rate profits report here.

Jul 10, 2011
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