What expenses should be included in CAP rate?

[Mike Wood]

I have started to look at 5+ unit multifamily units, with all of my experience being in duplexes (14 units current). I would like some help on determining what expenses to include in the cap rate to figure out the real cap rate on deals (as most brokers are using garbage expenses). I fully understand that CAP rate is NOI/Purchase price or value.

Here is what I think the list of expense (all that are paid by the owner) should be for determining NOI;

1) Property Taxes

2) Insurance

3) Utilities (electricity, water/sewage, trash as applicable)

4) Landscaping & Pest Control

5) Repairs & Maintenance

6) Vacancy

7) Management Fee

When comparing with market cap rates, is there anything else that is included (like Capex)?

Now for info on an actual listing I am looking at.  

6plex, 4x1bed/1bath units and 2x2bed/1bath units.  List price $750k

Actual annual rents $61,800 (listed rents are close, maybe able to get them to $70,000 @ 0% vacancy)

Vacancy listed 9%

Listed annual expenses $11,240 (only includes current taxes, insurance, water/sewage, lawncare, electric and trash)

Listed cap rate 6%

The problem with the expenses are many, a) it uses current taxes, which will go up significantly once sold, b) its missing management costs as the owner self manages, c) its missing any repair/maintenance costs as the owner does the work himself, d) its missing any Capex costs, e) insurance is based on his cost basis which appears to be much less than 50% of list price, f) using the brokers expenses, it makes expenses only 20%, which is bogus.

I realize that this list price is way to high, please help me understand all the expenses I should be including in my CAP rate calc so that I can determine where the value should be.

[Kim Meredith Hampton]

@Mike Wood You are exactly right on your expense itemization, plus anything that may be extraordinary about the property in its operations, but i think you are spot on

I always tell investors look at the OM as your starting point, never take those as the gospel. Taxes will reset at your purchase price (which can usually be determined on the county property appraisers site) insurance is usually low, maintenance and mngt fees always seems to low or non existent , especially in a mom and pop set up. When banks do underwriting, they are almost always using a 35%+ ratio for expenses, so I would reset your numbers and start with a 35% ratio to get the true NOI, or figure each one of the items mentioned above and get somewhere close with either scenario to determine your offer number