cap rate

[Joe Worley]

I understand that the cap rate is NOI/Purchase price. My question is - what is included in the purchase price?. Should it be the purchase price plus any acquisition cost?

[Account Closed]

I would not include cap-ex (capital expenditures) in my net operating income. Strictly speaking these are not expenses, but rather expenditures that either will improve the property (like a new roof), or an asset expenditure (like a washer/dryer). They are all depreciable, but depreciation is removed from the net operating statement. If you included the cost of a new roof in your net operating statement it would serve to reduce operating income and therefore reduce cap rate and the value of the building all during one period, and the next period that did not have a new roof expense would then have a sharply higher NOI and therefore value of the building. That's why cap ex is removed from the NOI.

Some people like to show a reserve account for the eventually capital expenditure that will take place.  But again, it has the effect of understating, although at least it is a uniform type of understatement applicable to all periods.

If you're wanting to see capital expenditure, I would do a cash flow statement.  I just wouldn't use that to calculate a cap rate, or a value for the building.

Finally, in my opinion I don't think the approximate value of the building calculated by using  the cap rate should include "acquisition costs".  Obviously these could easily vary from investor to investor.  I think the cap rate is used to calculate an approximate value for a building so that it can be compared with other buildings.  Acquisition cost would not be a part of this.

Just my views.