When analyzing MHP deal why multiply by 7?

[Rina Amir]

I realize you usually take 10% CAP into account. How do you figure out the specific market CAP? Like in CA there are probably different CAPs in different counties. San Jose will be different from Redding. Why multiply by 0.7?

[Skyler Smith]

Each market might have its own cap rate, but the cap rate is always calculated the same way. Take the net annual income divided by the market price of the property

So if you are looking at a MHP that nets $50,000 annually and commercial properties in that area are trading at a 7 cap, you can calculate the proper offer/purchase price by dividing $50,000 by 7%.

50000 / .07 = $714,285

If you have the purchase price to start with and you know that you want a 7 cap, all you have to do is multiply the purchase price by .07 (7%) to get the target net operating income.

$714,285 * .07 = $50,000

Hope that helps.