Calculation of a Commercial Propertie

[Uwe S.]

Hello :),

I saw in Brandons Topic the calculation of commercial properties in the US. I was little confused about this.

CAP RATE = NOI / COST
therefore
COST = NOI / CAP RATE

is okay for me, but in Brandons case the Cost is $580k (purchase price of the apartments), when I divide the NOI of $70k with $580k I become 12.06% CAP Rate. And $70k divided with 0.1206 is $580k.
But why involve the surrounding areas? In Brandons case 8.5% CAP, so he calculated and came to a value of $823k for this complex. In California it gives areas with 4% CAP in this case the value is $1,75 million. I can´t understand it.
Lower CAP rates = higher propertie value?

In Germany we calculate for the whole complex and only for the complex, not the area. Is the CAP Rate for the complex 12.06% and brings the property $70k NOI, then we make following.

VALUE = NOI x CAP ($844k = $70k x 12.06)

Is the area involved with 8.5%, the calc would be ($595k = $70k x 8.5), so the value only $595k for the propertie (undervalued).

Maybe I have a lapse now, but its important to correct this for my calculations in the US. So please help me out.

Thanks Brandon and Vikram for this impulse.

-Uwe