Newbie question about NOI, Cap Rate and finding a good deal

[Doug Larson]

Hi, Sorry for the newbie question. I just starting seriously looking into real estate investing about a week ago and have been reading and looking up as much information as I can. So the question I have is how come it doesn't appear that paying back loans / mortgages is considered when determining the value of a property? EXAMPLE: there is a property that I found for sale online which is listed for $220,000.00, The NOI is listed at $24,570 and the Cap Rate is listed at 11.16%. But assuming I put down 20% on the purchase that would leave me with a mortgage of of $176,000. Which comes to roughly $12,804 / yr so what I am actually looking at as profit for the year if everything goes perfectly (which I know is almost never the case) is about $11,766 is that correct? Which I then have to pay taxes on? It just seems like that is not much of a profit and would take me another at least 5 years to put a down payment on a similar property assuming i'm putting 100% of my earnings into savings. Again sorry for the newb question. I just want to make sure I'm doing my math correctly and get opinions if this is a typical looking deal in real estate? Would the above be considered a good deal? Thank you!

[Kevin Siedlecki]

@Doug Larson - You are basically correct. Cap Rate does not take into account financing, because everyone finances deals differently. In order to use the number as  basis of comparison, the Cap Rate assumes a cash purchase. 

You are taxed on your cash flow (in this case $11,766), plus the principal you pay off on the loan. 

A couple things:

1) This is a very cheap property to be valued by Cap Rate. Is it a commercial property?

2) You'll want to include some vacancy, maintenance, management, and CapEx in your assumptions to decide if it's a good deal. You haven't given details on the units or the rents for each, so that might be tough.

3) You'll probably need to put down 25%, not 20%, on an investment property. 

If you have priced in CapEx, vacancy, and maintenance, and managemnet in the NOI, then you're making $11,766 on a $55,000 investment - 21% COC ROI. Leverage will usually make your COC ROI better than the Cap Rate, which holds true here. Just make sure the NOI is accurate, and they haven't given you a perfect year to base your numbers off.

If I were to guess, I'd say management, vacancy, and CapEx would eat up almost all of that profit. Can you give more specific info on the units, rents, and expenses?