There are 3 figures that go hand-in-hand when trying to determine a commercial/apartment property's value. They are; Net Operating Income (NOI), Cap Rate (CR) and Asking Price or Purchase Price (PP). If you know 2 of the figures you can always figure out the third.

I will be talking about the NOI of a property. More specifically, how NOI is calculated as it relates to an apartment building.

We are going to start with a simplified version of how to arrive at the NOI of a property and then expand each category. Basically, the formula is: Income -Expenses (other than debt service) = Net Operating Income.

INCOME:

First thing, I determine the income generated by the property. I start with the Gross Potential Rental Income (GPI) or Scheduled Gross Rental Income (SGI). Both terms are used interchangeably within the industry. The GPI assumes that all apartments (100%) are rented at full market value even if some are actually vacant or discounted.

For our example, I will use a 30 unit apartment building that has all 2 bedroom, 1 bathroom units with market rents of $600 per month each. Th
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There are 3 figures that go hand-in-hand when trying to determine a commercial/apartment property's value. They are; Net Operating Income (NOI), Cap Rate (CR) and Asking Price or Purchase Price (PP). If you know 2 of the figures you can always figure out the third.

Here I'll be talking about the Cap Rate of a property. More specifically, how the Cap Rate works in conjunction with the Net Operating Income (NOI).

Let’s get started. First off, Cap Rate is short for Capitalization Rate. In short, Cap Rate is, “The process of converting anticipated future income into present value” according to the American Heritage Dictionary. It’s also your rate of return if you bought your property using all cash.

Here’s an example: If I purchase an Apartment Complex for $1M and it generates a Net Operating Income at the end of 1 year in the amount of $100K, then my Cap Rate is 10%. The formula for Cap Rate is:

CR = NOI / PP

Cap Rate (CR) = Net Operating Income (NOI) divided by the Purchase Price (PP) of the complex. Therefore, if we plug in these numbers: $100,000 / $1,000,000 = .1 or 10%. If this same complex generated $90K in NOI, its Cap Rate would be $90K / $1M = .09 or 9%. Lower income, lower Cap Rate, but the Purchase Price stayed the same.

Knowing the Cap Rate allows us t
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I get this question a lot, especially, during or just after a presentation showing an apartment complex illustrating a ‘cash on cash’ return in excess of 20%.

If you went to a Commercial Broker and told them you were looking for properties with a 20% COCR, they’d do one of two things;

1. They would buy the property themselves if they ever found one with a 20% COCR
2. They’d hang up on you because they’d think your expectations are unrealistic.

You probably won’t find an Apartment complex advertised with a 20% COCR. However, you can increase your chances of finding some great deals by doing a few things differently.

First off, there’s no big secret in ‘finding’ Apartment complexes for sale. Start by using the same vehicles most investors use. For instance, you can search through Loopnet.com or go to any of the major or regional Commercial Brokerage web sites such as Marcus & Millichap (MarcusMillichap.com), CB Richard Ellis (CBRE.com) or Sperry Van Ness (SVN.com) just to name a few.

        I get this question a lot, especially, during or just after a presentation showing an apartment complex illustrating a ‘cash on cash’ return in excess of 20%.

        If you went to a Commercial Broker and told them you were looking for properties with a 20% COCR, they’d do one of two things; 1-They’d tell you they would buy the property themselves if they ever found one with a 20% COCR or 2-They’d hang up on you because they’d think your expectations are unrealistic.

        You probably won’t find an Apartment complex advertised with a 20% COCR. Just like the broker said, if it fell into their lap, they’d buy it. However, you can increase your chances of finding some great deals by doing a few things differently.

        First off, there’s no big secret in ‘finding’ Apartment complexes for sale. Start by using the same vehicles most investors use. For instance, you can search through Loopnet.com or go to any of the major or regional Commercial Brokerage web sites such as Marcus & Millichap (MarcusMillichap.com), CB Richard Ellis (CBRE.com) or Sperry Van Ness (SVN.com) just to name a few. There are many many more out there.

        You can also peruse local newspapers in the market you’re
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