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How do you determine the CAP rate?
Friday, December 03, 2010
The CAP rate is determined by taking the NOI divided by the asking price plus average repair costs. This allows compairing apples to oranges, by first converting the orange to an apple. Any property in disrepair must first be brought up to like-new condition, and that expense is factored into the cost of aquisition. The NOI is determined by taking the GMI (gross monthly income), subtracting 5% vacancy rate, to get the GOI (gross operating income). Then taxes, HOA fees, .9% of aquisition costs for insurance, 10% of GOI for management, and 10% of GOI for maintenance is deducted from the GOI to arrive at the NOI. Management cost is always included, even if the owner manages the property themselves as a personal decision to increase profits. If the owner must move or falls ill, management must still take place and must be outsourced.
Posted by L Pippett at 00:00:48