How do YOU Calculate Cap Rate?

It is extremely difficult and frustrating for investors to compare apples to oranges – but when it comes to cap rates it seems that is exactly what they are doing. Too many take the remarks on a listing as gospel without running it through their own set of criteria first.

Don’t worry! You don’t need to be an accountant to design your own system to work out the numbers. (If you send me a quick message here on LinkedIn – I can send copies of what I have to help you.)

– even if you’re way isn’t perfect, by doing it the same every time you can easily compare investments –

With these systems in place our job then becomes making investment properties (or investments in general) look the same. No different than making adjustments to comparable properties in a CMA or appraisal – this process allows us to quickly cut to the bottom line.

Part of the “issue”, if you will, is that many people calculate the Cap Rate differently – so, their final number can be very dissimilar from yours. That matters when we start to use our calculations to negotiate price - but not vital for comparing investments. In the end, even if you’re way isn’t perfect, by doing it the same every time you can easily compare investments head to head.

Let’s look at two examples currently on the market to see how we do it.

So you can see from the two examples that list price means very little to the value we would assign to a property. Note: These two properties are in different market places and the price (and hence cap rate) likely differ due to supply and demand and likely condition as well.

In my examples I also left out any type of management fee and didn’t allow for vacancy. Even modest numbers for each would negatively impact the cap rate and thus lower our asking price. You would also be able to adjust for "Required Repairs" if there are items that need to be fixed right away.

What would you do differently?