👋 NOI / Cap Rate is Pointless
❌ Stop dividing the NOI by a cap rate to find the value of a deal.
When I come across a potential deal, that's the last thing I do.
It's pointless
→ I want to evaluate how the property is performing NOW
→ Where it COULD BE performing
→ And WHAT it will take to get there.
This involves (at a minimum) checking comps, creating a 5 year proforma, verifying taxes & insurance, and making assumptions about the business plan.
You can't determine if a deal is a pass/go simply from NOI / Cap Rate.
The art of underwriting involves finding value where others miss.
If you're passing on deals just from dividing the in-place NOI by a cap rate, send those over here! 😅
#2 All Forums Contributor
- Investor
- Virginia
Quote from @Justin Goodin:
❌ Stop dividing the NOI by a cap rate to find the value of a deal.
When I come across a potential deal, that's the last thing I do.
It's pointless
→ I want to evaluate how the property is performing NOW
→ Where it COULD BE performing
→ And WHAT it will take to get there.
This involves (at a minimum) checking comps, creating a 5 year proforma, verifying taxes & insurance, and making assumptions about the business plan.
You can't determine if a deal is a pass/go simply from NOI / Cap Rate.
The art of underwriting involves finding value where others miss.
If you're passing on deals just from dividing the in-place NOI by a cap rate, send those over here! 😅
Great points. The way I look at cap rates more back of napkin. Why? Because cap rates do not take into account capital expenditures and property condition. If a property has $200k NOI and a 5% cap rate - $4M valuation but needs $1M in work I would rather have the same asset at 4.5% cap rate- ie. pay $4.4M.
