Estimating cap rate?

[Account Closed]

Hi all, a long time ago I read of a simple way to estimate the cap rate on a property, divide the gross rents in half then divide by the value or asking price on the property.

I'm curious, estimating expenses as half of gross rents, does that incorporate mortgage interest? Or should that be further deducted in order to come up with a reasonable estimate if you're taking out a mortgage on the property?

Also curious how well this estimate fares in your guys' experience in terms of accuracy?

Thanks

[Ben Leybovich]

The NOI does not include debt service. This is done in order to compare apples to apples, and while all other expenses are equally applicable to all owners, the debt service is highly fluid since it depends on how a particular owner chose to finance the asset.

Having said this, pay attention to the wording I used above - "while all other expenses are equally applicable to all owners". This is important!

You are talking about estimating costs - why? Why should you need to estimate? Shouldn't you know?! After all, garbage collection costs what it costs, and so does snow removal, carpet installation, cleaning, painting, property taxes, etc.

Make it your business to know what stuff costs and you won't have to estimate...and you won't lose money, which would be a bonus :)