Cap Rates and How To Value Commercial Properties
ฝัง
- เผยแพร่เมื่อ 27 พ.ย. 2018
- Download a FREE Cap Rate Calculator and CRE Value Comparison Spreadsheet: learn.realestatefinanceacadem...
For COURSES & COACHING, visit realestatefinanceacademy.com/
For COMMERCIAL LOANS, visit www.evergreen.llc
-
Cap Rate is short for capitalization rate. It's a common real estate term that is primarily used to derive the value of a commercial real estate asset. Let's take a look at its components.
1. Cap Rate = NOI / Value
R = I / V
2. Value = NOI / Cap Rate
V = I / R
3. NOI = Cap Rate * Value
I = R * V
First, we have r, which is the Cap Rate. We have I, which is the Net Operating Income. And we have V, which is the Value. Or, in the case of an acquisition, the purchase price.
The Cap Rate formula is quite simple. The Cap Rate is simply r equals I over V. That exact same formula is also translated into V equals I over r.
Imagine you have a property with a net operating income of $100,000, and the value of that property is $1,000,000. That gives us a Cap Rate of 10%.
If that same property with $100,000 of net income had a $2,000,000 purchase price, or value, it would have a Cap Rate of 5%.
Quite often the net operating income of the property that's being looked at is set. It's fairly fixed, and the Cap Rate is determined by either the purchase price that's paid for the asset or the value, perhaps, on appraisal.
What this tells us is that, if an investor is acting as the buyer, then they typically want a higher Cap Rate. They want to have to pay less money for the same net income, rather than more money. Buyers are typically looking for higher Cap Rates, or a higher un-leveraged return. Whereas sellers would typically want to find a lower Cap Rate.
Let's take a look that in reverse from the seller's perspective. Sellers of real estate, quite often, will look at the existing market Cap Rates in order to determine the value of their asset. Typically, that goes something like this.
Imagine that seller has an asset for sale and in the same area there are several other similar type assets that have sold recently. Let's say this one here sold for a six and a half cap. This one here sold for a seven cap. This one sold for a seven cap. And this one sold for a seven and a half cap. Perhaps this one was slightly superior, maybe in age or quality. These two are comparable. And perhaps maybe this one is a little bit inferior. The seller might be able to derive that their Cap Rate is about 7%. Using that same formula of v equals I over r, $100,000 divided by 7%, 1.428 million.
Now, perhaps the seller thinks, hey, my property is comparable to the one that had a lower Cap Rate and maybe they want to say, okay, we're going to take that $100,000 but I'm going to sell it a six and a half cap. And then when they would find that their property is worth $1,538,000.
The point there is that quite often, especially as a seller, the net operating income is relatively fixed and using existing market Cap Rates from recent comparable sales, the seller can plug that number in and determine what their estimated market value is.
Important to keep in mind is that investors don't typically buy just on Cap Rate. The Cap Rate does tell them what the unlevered performance of the property is, 7% return, 6.5% return. But after accounting for debt and leverage, the buyers are typically looking for cash on cash return, rather than Cap Rate.
Cap Rates do allow us to compare different properties from a yield perspective. However, they don't necessarily tell us what the net return to the investor will be as would cash on cash.
CRE loan
investing in real estate
investment properties and commercial real estate
commercial real estate lending
commercial real estate loan
SBA commercial real estate loan
commercial real estate financing
commercial property loan
commercial building loan
real estate lending
best commercial real estate loans
commercial property lending
#commercialrealestatecoaching #commercialrealestateinvesting #EvergreenLLC #caprate #noi #netoperatingincome #realestatefinance #realestatetraining #realestateinvesting #commercialrealestate #commercialloan #commercialloans #apartmentloan #multifamilyloan #apartmentinvesting #multifamilyinvesting #diagram #example #stepbystep #stepbysteptutorial #diagram #example #download #freedownload #howto
![[TH] VCT Pacific Stage 2 - Week 2 Day 1 // RRQ vs TLN | DRX vs PRX](http://i.ytimg.com/vi/_OWt_-Lu3AE/mqdefault.jpg)
I thought it was a great video, then I realized he writes everything backward for the viewer. The talent of this man
I don't know what I'm more impressed with. You information or your ability to write backwards with GOOD handwriting.....with your left hand
Hi Jennifer! Thank you for the nice words! - Trevor
Awesome video Trevor! I will share this with my students
Thank you for the comment!
This helped , thank you
You’re welcome! Happy to help! - Trevor
Very good video, thank you Trevor 😃.
Thank you! - Trevor
"the higher the risk , the higher the expected returns", same goes to cap rate, the higher the cap rate the higher the risk of investment...Thank you for the informative lesson 🙏🏿🙏🏿🙏🏿
Thank you! Glad you liked it! - Trevor
Excellent explanation! How would an investor looking to buy know what the cap rates are in a certain city/town? Where would they find the NOI? Thanks!!
Thank you! The best way to get all of that information is to find a reputable Commercial Real Estate Agent who specializes in the type of property you're looking at. As a buyer, you don't pay anything for that broker's services, as they share the commission with the listing agent when the deal closes. Any good commercial agent can tell you market average cap rates, typical property expenses, recent sales comps, and much more. But do NOT use a residential agent or anyone who doesn't have experience in that specific property type. It's not uncommon to have relationships with multiple agents in a market who can provide you that info. Hope this helps! - Trevor
How would you figure out what the operating expenses are/we’re for a property that sold nearby?
The income is usually listed but I don’t typically see expenses listed. Thanks
The easiest way is to call the listing broker who sold the property and ask them for a copy of the offering memorandum or listing flyer. Tell them you want to use the info for comps/market analysis. They can check the MLS, LoopNet, Crexi, CoStar, etc. As long as you have a relationship with a real estate agent who specializes in that type of property, they should be able to help you find that info, but it’s not guaranteed. Does that help? - Trevor
Does net operating income include mortgage payments or not?
Hi. No it doesn’t. Check out my other video with more details NOI here:
How to Calculate Net Operating Income
th-cam.com/video/R3cGmYqHKeE/w-d-xo.html
What if you get a seller that has 4 acres with an noi of 150k that’s wants to sell it for 5 or 6 million because he thinks that a developer will buy it
That’s not uncommon. I’ve had many clients do that. BUT for a 200-300% premium like that, the seller often needs to stay in the deal as a partner with the developer and share the risk, then get the big payout several years later. They almost never get the big price premium AND the cash up front. It’s usually one or the other. But every parcel is different, so there are many different factors to consider. - Trevor
@@RealEstateFinanceAcademy unfortunately, the seller doesn’t understand anything about noi or cap rates he’s 92 years old. He just thinks because he has 4 acres on a busy road he could get five or 6 million dollars he doesn’t understand that his retail strip center with very low rent all month to month brings down value of the property it’s not even on sewer
@gennerobootz6490 Yeah, the best thing you probably can do as an investor is to send him an unsolicited offer saying “If you change your mind and want cash today…” Unsophisticated, unmotivated owners are usually going to be a waste of time. A better use of YOUR time and money is to focus on motivated sellers who are ready to deal, especially in this market.
not trying to sell our property .. wanting to borrow some cash... old cotton mill converted into an Event space 45 wedding a year , some Ga power rental, fill movies every 2 years.. how can do I come up to a valve current debt 130k.. purchased 10 yr ago 390k
I can help you with that. Should be pretty easy, but it's not going to be a straight real estate investment loan. Send me an email at info@evergreen.llc and let's talk. - Trevor
net operating income is not fixed.
The point is that, as a buyer, you can apply a different Cap Rate, but the NOI is what it is. Hope that helps. - Trevor