Understanding Cap Rate Numbers

[Rickey Miller Jr]

I'm having a bit of a difficulty understanding Cap Rate, I figured I knew my numbers on this but I can't seem to calculate the same number BP is showing on Rental Property Calculator. I've got a seller allowing me to do owner finance on a 240 month term with a 2% IR, that will balloon in five years with zero percent down. Location: Blue collar C class property. 

BP Breakdown: https://www.biggerpockets.com/...

My questions are BP is saying my Purchase Cap R is 10.87% since I'm buying it with equity built in are there two different Cap R, because i've read "Capitalization Rate = Net Operating Income / Current Market Value"? Also what specific expenses are needed to calculate regular upkeep for property? 

Scenario: 

ARV: 79,000
PP: 55,000 - 240 month term - 2% IR - 5 Year Balloon - Zero Down
Entry Fee: 1,500 (Closing cost and commision)
Principal & Interest: 278.24 
Taxes: 96.75 
Insurance: 54.58
Monthly PITI: 429.57
Current Rent: 800
Repairs: 6 %
Vacancy: 7%
Cap Ex: 6%
PM: 0%

Thank you to whom ever helps me run these numbers but I just truly am trying to get the Cap R calculation, I'm an analytical person and it's just not adding up on my end!

[Mitch Messer]

Hey @Rickey Miller Jr, I congratulate you for performing a financial analysis of your deal and I love that you're seeking to actually understand it!

First off, I've got to warn you about using the BiggerPockets Rental Property Calculator. Yes, it's very seductive, with easy-to-use data range sliders, impressive-sounding calculations (like "pro forma cap" and "50% rule cash flow") and pretty charts and graphs.

But here's the problem: There's almost ZERO context provided anywhere on that report to make sense of all this info-noise. Even worse, some of the "helpful" tips provided are just plain WRONG. For example, capitalization rate is absolutely NOT "the rate of return an investor can expect from an investment in real estate, assuming they pay all cash." (See https://www.biggerpockets.com/... to learn why!)

But, to answer your question, here's what's happening:

• Purchase cap - This is just cap rate (= NOI / Purchase_Price), so here it's $5,976 / $55K or 10.865%.
• Pro forma cap - This is NOI / After_Repair_Value and the Calculator is using the same $55K, which is not correct. I suspect this is because you have upfront repairs set to zero (which is highly unlikely). Still, this calculates to the same 10.865% as above.

That's why these two metrics are showing up as the same value.

The real question here is whether cap rate is at all helpful for an analysis of a single-family house. (HINT: It's not.)

Keep digging for the meaning behind the numbers: It's the only way this stuff starts to make sense!