Income Capitalization Analysis

[Oleg Enik]

Hello everyone!

I have been studying a lot of real estate financial modeling and analysis, specifically for commercial real estate and I understand all the concepts, terms, and calculations very well.

But I am struggling to put all that knowledge into practice. For example, if I want to perform a simple income capitalization analysis of a commercial property, the 1st thing I would try to do is figure out the Net Operating Income. What resources could I use to find the total income for a specific property. The main and largest component of the total income for a property is the rental income. So where would I find the in-place rents? And then there is also other income such as laundry income, late fees, storage income, etc, but I imagine it would not be a substantial amount. 

In terms of expenses, I've heard it is good to call property management companies in the area and ask about the average expenses. Do you guys have any other suggestions?

Lastly, I would need to choose an appropriate cap rate. I know that is an important part of the equation and it is heavily dependent on the market and whether you are looking to buy or sell. What would be the best place to find an appropriate cap rate? Would it be to call local brokers?

Thanks for help!

[Taylor L.]

It depends how deep you intend to get into the analysis. As @Brett Peters said, if you want to get down into it then you need the T-12 and rent roll. If you just want to get a rough idea, use online sources to find out what the place is currently renting units for. They might be giving concessions beyond that as well.

As far as storage space, again, see what they're charging. You can secret shop all you want! Give them a call and ask what they're offering.

Expenses: when you're doing quick and dirty analysis, this is where ratios come into play. There are resources out there to give you more direction, but you might assume an expense ratio anywhere between 40-50% depending on size, class, location, and age of the property.

Brokers are typically the best source of market cap rate and other information like that. You can also talk to other investors and ask what they're paying.