Originally posted by @Jon Holdman:
@Gretchen Roberts sorry, but the cash flow doesn't factor into the value at all. NOI does. NOI is before debt service. Your debt and debt service payments, as well as the debt and debt service payments of a potential buyer are irrelevant to setting a value for the property. NOI and CAP rates are all computed without any consideration of debt service.
Prevailing CAP rates, such as they are, can change over time. They are somewhat tied to the quality of the area and the asset. A better asset in a better area will have a lower cap rate than a poor quality asset or a poor quality area. So, if the area improves, cap rates go down and vice versa. Similar for the asset. But cap rates are also affected by demand. Investment properties are just a commodity, like any other investment. If investor demand for such properties is high then values will tend to rise. If everything else remains the same, that means cap rates fall. That's why you see very low cap rates, 4-5%, for quality NNN properties in hot markets like CA.
I do understand that and am not being clear I think. The thing I'm trying to solve is the IRR at different holding periods. So working backwards, in order to calculate the IRR at say the 10-year mark, you have to account for the initial cash investment, then the cashflows in years 1-10, and finally the cash you receive from the sale.
So in order to calculate the cash I'd receive from the sale, I was trying to figure out how to calculate what the sale price could be in year 10 based on the projected NOI and cap rate. The reference I made to the mortgage was only to figure out what the cash from the sale would be, not for NOI.
Now that I'm learning cap rates can change over time, I wonder how it's even possible to calculate an IRR without a lot of guesstimates/projections on what you think the NOI will be and the cap rate, which are both to an extent based on market conditions. But isn't IRR supposed to be the best metric for an investment?
