CAP rate?

[Tara Piantanida-Kelly]

Hi All,

I understand that:

• CAP rate = NOI/purchase price
• Value = NOI/CAP rate

So, if I want to establish the VALUE of a property, how do I get the CAP rate?

I took the following notes in a commercial class I took: "You don’t know the cap rate. You get the cap rate for the area from the mortgage broker who specialize in the product you’re buying (multi-family). Ask them 'How should I underwrite this deal?' They’ll ask you questions, and then they’ll give you a number. They’ll say 'We can probably get you a loan at a 7 cap rate (or something like that).' If they are Fanny/Freddy approved, they can look at maps and give you the number."

But every time I put a call out to mortgage brokers to get a CAP rate (according to my notes), I'm told "you get the CAP rate by dividing the NOI by the purchase price". Yes, I'm aware of that calculation, but I'm trying to establish the VALUE... And around we go...

Any mortgage brokers want to chime in on this?

Thanks!

Cheers~

Tara Piantanida-Kelly

RogueSolutionsLLC.com

[Doug Smith]

@Tara Piantanida-Kelly I'm sorry to say this, but mortgage brokers are the wrong person to ask. Perhaps they meant REAL ESTATE brokers rather than MORTGAGE brokers. Even then, multi-family properties in several areas of the country are "bid up" quite high. The lower the CAP rate, the more you will have to pay for the property. Listing realtors tend to push for lower CAP rates. Also, getting to the net operating income (NOI) is different for nearly everyone as most people are going to apply different variables to the equation (management fees, vacancy rates, etc). If you have access to loopnet.com, you can pull several comparable sales in the area and see what they are saying. Often times you can see the NOI on that site along with the actual sales price. We lean pretty heavily on comp sales with respect to establishing market CAP rates. Keep in mind that listing brokers will also use aggressive variables to determine NOI (insanely low management fees...or they will leave that variable out all together, low vacancy rates, etc) if you are looking at comp listings. It is an art as much as it is science. Do you have a friend that is a strong COMMERCIAL real estate broker that can advise you? Not all realtors are alike. Most don't understand the commercial/multi-family marketplace. Good luck!