CAP Rate calculation

[Charles David]

Can you guys and gals help me check out my CAP rate calculation and tell me if there is any thing I have forgotten? Cap Rate is Net Operating Income divided by Property Cost or Value. Net Operating Income= +Revenue generated - Operating Expenses INCOME is just the Rent $990/month EXPENSES are: HOA fee (WSG). = $240/mo Property TAX. = $88/mo (1056/12) Hazard Insurance. = $ 18/mo (210/12) Maintenance + Repairs = $ 17/mo (600/36) Total Operating Expenses = $ 363 / mo +Revenue generated = $990 / mo - Operating Expenses = $363 / mo Net Operating Income= $627 / mo ANNUAL NOI -- (627 X 12) = $7,524 PROPERTY COST WAS 119,500 7524/119500=0.0629 So the Cap Rate is 6.3% ? Or should I be using the current market value instead of the cost of the property? Thank you. Charles

[Ned Carey]

Cap rate is based on the price of the property.

Your math is correct however you are leaving out a number of items.  What about management fee, vacancy rate, turnover cost etc.? I suspect your repairs and maintenance number is low unless it is a very new property.

You may say that you are going to manage it yourself however that is false logic. Yes managing yourself is a legitimate choice. no one will watch over your property was well as you can. Managing your self also means you take in more money net. However Cap rate is a measure of how (your investment in) the BUILDING is performing. If you are managing the property, your efforts are generating part of the income. Your investment in the building isn't generating that money, you are.

(I edited this by adding the words "your investment in". Bob Bowling's post reminds me that is a more accurate description.)