All Forum Posts by: Jon Raccah

@Josh Tyler

Cap Rate = NOI / Value (or sales price)

So when a broker lists on Loopnet they put in NOI and asking price and Loopnet auto calculates the Cap Rate

Loopnet

Research local brokers and see if they have email lists you can sign up for, if not frequent their sites. 

Networking 

Loopnet 

@Account Closed

Ive tried this and failed miserably, ended up selling the site to someone who ripped it back apart and rented the 10k to a single tenant. My mistake was fragmentation i tired to make 5 x 2000sqft spaces and ended up making 2 of them functionally obsolecent. If you split it down the middle and its a square or rectangular space that can easily be divided it may not be a bad idea. Otherwise just blend and extend. 

@Joseph Young

In my experience billboards are always included in the NOI number which is then divided by the cap rate to give you a rough estimate of value, so to answer you question in short yes it should be included.

At the end of the day, real estate has to be looked at as an investment you're buying today cash flow for tomorrow. As the billboard contributes to these cash flows you must include it. 

JR

@Alex McGhee

Pretty tough to say without knowing quality of construction, finished, etc. The area near UM is very nice but youre likely looking at student rentals (which means they have to stand up to alot of wear and tear). If you could give me some more details such as: NOI, Year build, what kind of shape its in, etc. I could probably give you a pretty close range.

JR

@Page Huyette as Chet mentioned you have to be very careful here because now youre buying a company and not a property. A few thoughts:

-I believe 1031 would be out out as this transaction would no longer be considered a like kind exchage.

-You have to do very detailed due diligence because that LLC could have outstanding debt (outside of what purtains to the property) they dont tell you about and from a collectors standpoint, youd be assuming that as well.

-I would also get a very experienced corp attorney to write a very detailed operating agreement where you clearly define what the roles of the people involved are (i.e. the person remaining in the llc doesnt recieve any profits)

All in all this is something that is quote common in M&A (utilizing a stock sale rather than an asset sale) but in those cases there are clear advantages. Not sure what advantages there are here. 

JR

@Christine Swaidan Thank you for the kind words, never had much interest those other things. 

My acquaintance invests in long-term NNNs from AAA rated tenants, usually won't touch with less than 10 years remaining. He tries to focus on up and coming markets (areas with large population growth), this way he can virtually ensure that there's no downside and strong potential for appreciation. Samples markets would are: Houston, San Antonio, Austin, Charlotte, Raliegh, Dallas, Denver, Seattle, Orlando. 

Bear in mind while you could incurr a capital gain tax of $175k if youre reinvesting you can use a 1031 exchange to avoid the tax. 

No problem Chris. Good luck!

jonraccah@gmail

@James W.

The Purchase Price should be based on GOP - and not NOI - correct?

Purchase price should be calculated on value, market cap rate divided by NOI can help you get and idea of what the market would expect the price to be. Also, GOP is not a term commonly used in real estate (in my experience) because there is no real cost of goods sold (COGS), I think the term you're using would be gross potential rent (GPR) which is essentially your gross income before factoring in your vacancy.

You must take it down to NOI because every property has different expenses and while the GPR (what youre calling GOP) can be the same for two properties they can have 2 completely diffent set of expenses. So lets run through an example:

you have 2 properties, PropA and PropB, 

theyre both 1000sqft and both get $10psf in rent. So $10k a year in GPR, if you only looked at this you would assume both properties have the same value

Now lets say PropA is in a condo assoc. and PropB is not. Thats an additional expense of lets say $1,000 per year that affects your NOI, so now PropA has an NOI of $9k and PropB has an NOI of $10k. See the difference?

There will be payments due to your lender on the Purchase Price.

Keep in mind that debt service is never factored into NOI because every investor structures their deals differently.

To show this as an example - the rental income of 78K - this should be called the GOP.

Again I think you're referring to GPR here

Determine Purchased Price based on GOP -

78000/8% = ~1MM.

This calculation should be made on NOI

Now if you took a loan @ 4% on 75% of this purchase price - after making 25% down payment.

Your payments are

1MM x 0.75 x 0.04 = 30,000

So the NOI is

78K - 30K = 48K.

This is not NOI is actually your Net Cash Flow (NCF) and you can calculate your return on investment % (ROI)

So the effective cap rate I see is

48,000 / 1,000,000 = 4.8%

This would be your ROI

Is this the right way to think - when I take a loan on this property.

Try to keep this format in mind (and if you'd like to see a spreadsheet shoot me an email id be glad to share one with you. 

Gross Potential Rent (GPR) aka Gross Potential Income (GPI)

-Vacancy & Credit Loss

---------------------------

Net Rental Income

-Expense reimbursement income

--------------------------

=Effective Gross Income (EGI)

-Operating Expenses (OpEx)

-Reserves (some ppl don't keep reserves)

-------------------------

=Net Operating Income (NOI)

- Annual Debt Service (ADS)

-------------------------

=Net Cash Flow (NCF)

Return on Investment (ROI) = NCF / Total amount invested (equity+debt)

Cap Rate = NOI/Value (if you don't know value, plug in cap rate and solve for value)

@Quin

Cash on Cash would be NCF / amount of CASH invested (i.e. down payment) 

Sorry for the length of the post, hope it clears some things up. 

JR