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Updated over 8 years ago on . Most recent reply
CAP Rate or Comps
Hello BP Community,
This question is for the savvy REI's out there. When determining what is a great investment, what is the best way to go about it?
here is an example of a property for sale in my area:
Duplex
809 N Hobson Ave, West Sacramento, CA 95605
Listing Price: $348,800
Current rents: $925
GAI: $22,200
What is the best way to determine the CAP rate? I like to use 8%. Just wondering how you guys do it?
Thanks
Most Popular Reply
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You're missing some pieces to the equation:
Cap rate= Net operating income / Purchase price
So for your example
Cap Rate= NOI / 348,800 (This is IF you bought it at list price)
One step further
Industry standard says that NOI is typically 50% of Gross income on the property (this will vary by property). For your example this means $22,200 X .5 = $11,100. Using this assumption we get...
Cap Rate= $11,100 / $348,800
Cap Rate= 3.2
Market cap rates are simply the returns investors are willing to take within that market for comparable assets.
With all that being said you would not value a duplex using cap rate. You would would value a duplex using comparable sale in the area.
I hope I understood your question correctly and my answer helped. Feel free to reach out If I can be of help.