how to evaluate cap rate on sale

price $1,350.000 Rents $84000 year mint condition ,Brand new and renovated everything
In Selling Property - Asked by Lorraine P. - Aug 14, 2011
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Answer(s)

Navin T.
Alpharetta, GA

You need to know NOI to calculate CAP rate. NOI - Net Operating Income is the net left at hand after taking out all operating expenses. Note that mortgage payments are not operating expense.
Once you have NOI calculated, divide it by Total Purchase Price (sales price) to get CAP rate.

Aug 14, 2011
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Leah H.
Hopkins, SC

Dear Lorraine,
The cap rate calculation requires E&O to properly calculate. The cap rate is the
Net Operating Income (income - expenses)/Purchase price.
An average cap rate is 7%.
I have calculated this property without any expenses. The cap rate is 6% without factoring in expenses. This means that if the expenses are $30,000 per year the cap rate drops to a mere 4%!
Given just the two figures you've provided this property isn't a good investment for cash flow. It needs to be in a diamond state where appreciation is very high. In that situation a lower cap rate (below 6%) is expected because the property value appreciates greatly in a normal market place.
Thanks for asking. Best of luck.
Leah A. Henderson, Realtor

Aug 17, 2011
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Glen W.
Lender/Mortgage Broker
Atlanta, GA

Be careful on using an average cap rate, the cap rate greatly depends on the property, who the tenants are, the length of their lease, etc.. Without knowing the details it is impossible to determine the value. For example if this property were in downtown Detroit vs downtown Denver the value would be drastically different (ie, much lower cap rate in Denver than in most of Detroit). Furthermore if this property is a rooming house, the income could be great, but the expenses would be large to manage it. Good luck with the investment, as always buyer beware

Aug 24, 2011
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