Coldwell Banker Commercial, NRT
Multifamily Group
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Calculating the
MultiFamily
Cap Rate.
What is a Capitalization Rate?
Real estate investors looking for income should crunch a few
numbers and research past area multifamily appreciation. One calculation is the capitalization rate or cap rate for short. The
cap rate formula gives you a percentage which represents an idea of how long it
will take to fully capitalize or pay off your property. This is done by taking
the gross operating income the property produces and dividing that by the value
of the property. The value is either the most recent purchase price of the
property or based off a current professional appraisal value; whatever is most
accurate. The formula is presented below:
Cap Rate = Net Operating Income / Property Value
What variables make up the Cap Rate?
To properly calculate the formula some variables need to be defined:
Gross Scheduled Income (GSI) - This is the gross amount of annual rental income
you would collect if you had 100% occupancy, and if all tenants fully paid their
rent. There may be some other income besides rental income that the property
produces. If so, add as other income.
GSI = (Gross Rent * Units) + Other Income
Vacancy and Credit Loss (VCL) - This is an estimation of how much money will be
lost due to vacancies and non payment of rent. This lose is expressed as a
percentage against your gross scheduled income. One way to get this estimation
is by analyzing similar investment properties and seeing what their average
annual vacancy rate and credit loses are for the year.
VCL = Gross Scheduled Income * (Lose Rate)
Gross Operating Income (GOI) - This is when you take the gross scheduled income
(GSI) and subtract your vacancy and credit loss (VCL).
GOI = Gross Scheduled Income - Vacancy and Credit Loss
Operating Expenses - These are the expenses for the operation and maintenance of
your property.
Some examples are:
Repair and Maintenance Costs
Property Management Fees
Property Taxes
There is some variability to what makes up this expense, so have the seller
define the items and costs that makeup this number. The aggregate is the total
costs to run the property. Not all expenses are operating expenses. This number
should not include capital expenditures or other expenses that are not related
to the running and operation of the actual property.
Net Operating Income (NOI)
This is the gross scheduled income you can expect from your
property minus vacancy, credit loss, and operating expenses.
ALSO: As an investor we must always take into consideration the LOCATION and the purchase TIMING.
Click Here:
First Qtr. 2009
Southern California Apartment Capitalization Rate
Update
Third Qtr. 2009 Southern California Apartment
Capitalization Rate Update
First Qtr. 2K10 Southern California Apartment
Capitalization Rate Update