How to use the frequency to determine the Cap Property rental

Property to rent as multifamily, office buildings, warehouses, retail shopping centers and similar properties that generate rental income and others can be valued using the capitalization rate.

This is particularly useful when you want to get a rough list, or the resale price quickly and easily. When you might want to suggest a price for a particular rental property based on the capitalization rate or market rate of capitalization required of the customer, for example.

This article will guide you through the process that uses a situation of scenario. Suppose you were asked by a client to suggest a selling price for its 8-unit apartment complex.

A) determining the net operating income

So you understand. Net operating income (or NOI) is one of the most important calculations made in relation to any investment property because it represents potential income of the structure, after all expenses of operation and vacancies have been subtracted, to consider how productive the investment property , or measure of cash flow.

When the property is financed, for example, U.S. is the cash flow available to pay the mortgage, if the investor pays all cash for the property, thus eliminating a mortgage, then it becomes the annual cash flow (ie, cash flow before taxes).

Your first order of business, then, is to determine the net income of the structure.

Here's the calculation.

Expected gross income (GSI)

Less vacancy and collection losses estimated

= Effective gross income (EGI)

+ Income from other sources, such as late fees, vending machines, etc.

= Gross Operating Income (GOI)

Less annual operating expenses such as property taxes, utilities, insurance, maintenance and repair, landscape, management fees, legal and accounting fees, etc.

= Net Operating Income (NOI)

For our example, suppose that the property has an income of $ 54 000 ISO, the loss of vacancies $ 2700, $ 600 income from sources other than rent (ie, coin-operated washers and dryers), and $ 20,760 annual operating costs.

$ 54 000 (GSI)

Less than 2700 (Vacancy)

= $ 51,300 (EGI)

+ 600 (Other Income)

= $ 51,900 (GOI)

Less than 20760 (operating expenses)

= $ 31,140 (U.S.)

B) Determine the required rate of return

So, we must determine the capitalization rate that we use for our calculation using one of two approaches. Or will we research the market for properties of similar income to arrive at a rate of market capitalization, or use the customer's desired speed.

For our example we assume that similar investment rental properties in our market area indicate an average rate cap of 6.23% and, in turn, make the decision together with the seller to use this rate. Keep in mind, however, if the seller is adamant about using his own desired frequency, and is different from the market rate, we would side with the customer.

In other words, if our seller preferred to use a capitalization rate, for example, 5.5%, then we calculate its rental value of the property on the basis that the rate of return.

C) Calculate the value of real estate

Finally, now that we have a net income of $ 31,140 of the structure), and is expected to use the market rate of 6.23%, we can calculate our customers property value of income with this formula: Net operating income / rate cap value = real estate, or $ 31,140 / $ 500,000 = 6.23%

Okay, now you are ready to call the customer. Based on net operating income of $ 31,140 and a market capitalization rate of 6.23%, it is estimated that the residential customer has a market value of $ 500,000.

Of course, for our purposes, we kept simple. In a real life situation, of course, would like to use credible and accurate (not pie-in-the-sky) the numbers to get to the NOI of the property. Moreover, it would take into account other factors that may affect the value of the property.

Upside rent potential, for example, or the ability to add additional units to the property would definitely increase its market value. Considering that, maybe a zoning regulation that make it a holiday coming less desirable, and perhaps a negative impact on rents or decrease occupancy levels, would fall on its market value. But you get the idea ....