Cap Rate.. based on previous owners purchase

[Tyler Hallman]

I am new to running commercial deals and when looking at cap rates and NOI the numbers don't quite make sense.

Example: 

Asking price - $1.175m

Cap - 6.36%

NOI - $74,000

Its a 5 unit in Denver, Colorado. I can see how their NOI is $74,000 if they bought this 20 years ago for 500k and their monthly payment for the entire complex payment is around $2500 per month but now they are making $1800 per unit per month. So for example as the purchaser (me) my new monthly payment for that entire unity is say $5000 per month. That very roughly makes the NOI 48k dropping the value by a lot. Am I doing these calculations right or thinking of this the right way? It seems pointless to advertise the cap as it sits because at the new purchase price that will change the NOI drastically and in doing so changing the cap rate. Thank you for all your help!

[Michael Le]

The NOI calculation does not include debt service, so your monthly mortgage statement is separate. Similarly, the cap rate is an unlevered number, as to be able to compare properties apples to apples (since properties are likely to have different loans on them) so it also does not take the loan into account.

So in your example the broker/seller is saying that if you bought the property for cash it would generate $74k a year in cash flow. Assuming their income and expense projects are correct then that will give you a 6.36% return.