CAP Rates & Replacement Reserves

[Account Closed]

I was wondering if anyone factors Replacement Reserves (i.e. potential future CAPEX repairs) into their CAP Rates when doing a property analysis? As many of you know a CAP rate is Net Operating income (NOI) / Purchase Price. I've noticed some people include Replacement Reserves below NOI when calculating cash flow and some put it above the line. This creates some variation in the CAP rate. The same could be said about property management. This article helps explain the variation, but what is the correct way?

http://www.ccim.com/cire-magazine/articles/323788/...

Thanks,

Josh

[Immanuel Sibero]

@Account Closed

If you were to calculate the cap rate of one particular property only, I could see the dilemma of "to include" or "not to include" Replacement Reserves in NOI. However, cap rate is a metric normally used in comparative analysis among several properties. I would think consistency in defining cap rate and NOI across the different properties being compared is more important than which variation is correct.

The article you pointed out actually addresses your questions:

- NOI should be defined consistently among the properties being compared. Any item below the line on one property should also be below the line on all the other properties being compared... and vice versa.

- There are variations in the way people define NOI when calculating cap rates but the article makes no determination as to which variation is correct or incorrect.... probably because it really doesn't matter. Or does it?

Immanuel