Calclulating Cap rate

[Anthony Harris]

Hi All,

I was hoping any landlords or flippers could shed some light on how they calculate the cap rate of a rental or flip? I know the formula is Net Operating Income/Gross Rental income. But what I'm not sure is how you account for the Expenses and what expenses are involved outside of property tax. Any feedback is greatly appreciated, thanks!

[Neal Collins]

First off is determine when to use different approaches to value a property. A cap rate doesn't translate very well for a SFR flip because the value is derived from comparable properties. Multifamilies work best with cap rates. In that you need to figure out what are your operating expenses in order to get your Net Operating Income. You should start networking with other investors in the area and asking them generally what their expenses are. It's very location dependent, and it's nice to have a ballpark ratio that you can use for quick back of the envelope calculations.