cap rate calculation. Do people include closing costs or not?

[Lewis Christman]

Survey I guess. When you calculate your cap rate (NOI - net operating income / Purchase Price) do you include your closing costs and initial repairs in your calculation or do you just go with the actual purchase price and leave those costs out?

[Immanuel Sibero]

@Lewis Christman

Sometimes it's like pulling teeth to get an answer to a specific question, isn't it? LOL

Let me give this a try... so this is IMO. The cap rate formula calls for NOI divided by "Purchase Price" but note that sometimes people use "Cost" or "Value" in place of "Purchase Price". Regardless of what it's called, IMO cap rate calls for all costs associated with 1. acquiring the property and 2. placing the property in service as a normally operating business.

- Do you include closing costs - survey, title, recording fees? Yes. Why? Because you wouldn't be able to acquire the property without paying these costs.

- I'm assuming initial repairs are known repairs that need to be made to get the property to operate normally . Do you include these costs? Yes. Why? Because you wouldn't be acquiring a normally operating business without paying these costs.

The term "Purchase Price" is probably the source of confusion here because it is ambiguous. If you think of it as "Acquisition" price in a sense that you are acquiring a functioning business then you would probably have a better idea of what costs to include and what not to include in the "Cost" or "Purchase Price" of your "Acquiring" the property . Hope this helps.

Cheers... Immanuel