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Using CAP Rate for making offers

Wayne58

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Mar 17, 2009
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Hi
I am thinking of buying a fourplex for 164,000 the units are all rented with GI of 30,200, expences of 13,500 leaving the NOI of 16,700

I am trying to detrimen a fair asking price using the CAP rate { if I have it right from my reading}

NOI/sales price = CAP 16,700/164,000 = 10.18% CAP


What I would like to know is if I use NOI/12/CAP = asking price or fair market value based on current income?

16,700/12 = 1391.666 / .1018 = 136,705 my offer

or

should I take into account to add the 5% for vacancy, 5% repairs, and 5% Administration to the current expences of 13,500 which would now be 13,500 + 4,527 = 18,027 leaving new NOI of 12,173 and redo my offer

any suggestions?

Thanks

wayne58
 

terri

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QUOTE (Wayne58 @ Mar 17 2009, 03:00 PM) Hi
I am thinking of buying a fourplex for 164,000 the units are all rented with GI of 30,200, expences of 13,500 leaving the NOI of 16,700

I am trying to detrimen a fair asking price using the CAP rate { if I have it right from my reading}

NOI/sales price = CAP 16,700/164,000 = 10.18% CAP


What I would like to know is if I use NOI/12/CAP = asking price or fair market value based on current income?

16,700/12 = 1391.666 / .1018 = 136,705 my offer

or

should I take into account to add the 5% for vacancy, 5% repairs, and 5% Administration to the current expences of 13,500 which would now be 13,500 + 4,527 = 18,027 leaving new NOI of 12,173 and redo my offer

any suggestions?

Thanks

wayne58

in the past when I had a 4 plex appraised, the appraiser used 3 ways to determine the value of the property.

#1 direct comparison. has there been any similar 4 plexes in your area with similar rental incomes that you could use as comparables?

#2 cap rate. the appraiser did take into consideration vacancy, repairs and property management costs at a rate of 7%, but the cap rate that you use will be determined by your location and cap rates in the area.

#3gross rent/sale price. the appraiser used this to determine value because he did not have accurate cap rates figures on the comparable properties to determine what the real cap rate is in the area.

hope this helps.

Terri
 

Dan_Eisenhauer

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Your math in your formula is wrong, to start.

Don`t divide the NOI by 12 and then again by the Cap Rate.

Using the 10.18 Cap Rate, the value would be $164,000. (16,700/.1018=164,047)

If your offer is to be $131,000, you are using a Cap Rate of .127. (16700/131000=.127)
 

Nir

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Dec 5, 2007
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1950,

As Dan mentioned, math is completely wrong! for example you wrote "1391.666 / .1018 = 136,705". but it`s $13,670 regardless of the fact that this calculation makes no sense.

It`s important you understand the logic behind the formulas so 1. you do not make such basic mistakes 2. you are not being taken advantage of due to poor analytical skills.

some tips:
- the expenses the agent provides are in 99% of the cases wrong (not to be too direct and say the truth - lies). expect expenses to be around 2K higher in this case. again you need to understand the formulas in order to be able to estimate the expenses more accurately instead of using partial information that the real estate agent provides (I`m not generalizing, only 99% of them behave this way:) A personal example "oh, you live elsewhere. yeah, that`s right. then in this case you need to add property management fees. yes you are correct". that` why I am saying being really comfortable with math, RE formulas, your judgment etc will prevent such issues.
- if you want to negotiate based on an expected CAP then here is the formula: expected price = (annual rent - your estimated annual expenses)/your wanted CAP.
- you see it actually sounds like a really good property potentially (I`m not sure of course... where is it?). but you may still lose an opportunity unless you are comfortable with your own analysis.

Good luck,
Neil
 

kreezo

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Apr 13, 2009
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For example if I am looking at a 7% cap rate but based on research (i.e. appraiser/broker) the area generally should yield say 8% cap rate then I should do = gross income - expected costs / regional avg. cap rate to determine the value that I should pay for?

How would I determine what the CAP rate should be? Toronto would be around 5.5-7.5%?
 

Thomas Beyer

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Aug 30, 2007
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QUOTE (Wayne58 @ Mar 17 2009, 03:00 PM)
Hi

I am thinking of buying a fourplex for 164,000 the units are all rented with GI of 30,200, expences of 13,500 leaving the NOI of 16,700..


seems like a decent deal !



your expenses are possibly too low .. unless tenant pays for all utilities (heat, water, electricity) ..



anything with prices lower than 100 times monthly rent is worthy a look.



What is the overall condition ? suite size ? historic vacancies ? good area with upside ? views ? balconies ? condo conversion potential ? who pays for utilities ?



All key factors .. besides CAP rate !





Items to consider when buying an apartment building: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-14548-Buy_vs_Build.html



Multi-Family Primer in May 2009 Issue of Canadian RE Magazine:

http://myreinspace.com/rein_members_only1/Members-Only_Discussion/81-10996-Multi-Family_Primer_-_May_2009_Issue.html
 

Nir

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QUOTE (ThomasBeyer @ Jan 25 2010, 07:50 PM) seems like a decent deal !

was a decent deal.. in Mar 2009. probably no longer available.. either the property or Wayne
 
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