How important is it to know cap rate & NOI

[Malcolm Darensbourg]

How is everyone doing? Right now I'm learning how to analyze buy and hold properties. I want to know how important is it to know the Cap rate & NOI before placing an offer on a property ?

[Steve Vaughan]

In the residential world of analyzing houses, not very important to 'figure out' the CAP rate of an individual house. NOI and knowing how to deduce it is always important for your own personal analysis.

In the commercial world, it is important to know the Market CAP rate. What others are paying or accepting. Then you will know if a building is being offered at a discount or premium and you can do further research to discover why.

 For instance, in my 2 little markets, my b-/b apt buildings over 5 units are being sold for a 7.5% cap in 'the city' lol and my rural ones are 8.5%.  I bought at 10% and 13, respectively.  They are moving in the right direction, but I am waiting a little longer to divest as I believe low inventory and economic factors are favorable.  I will sell when they compress to 6.5% & 7.5% which is real close to insurance replacement cost estimates per foot.  Another key metric I seek to sell at.

In addition to CAP rate, other important commercial metrics are GRM and price/sqft. Most are in the residential space it seems, so this post is probably worthless to you @Malcolm Darensbourg.  Are you analyzing houses or commercial assets?