Posted by Eric C on August 25, 1999 at 14:06:45:
The formula for determining property value by cap rate is simply: NOI (the net operating income) divided by the cap rate (the rate of return desired).
For example, a property that currently has an NOI of $5000 would be valued at $ 50,000 using a cap rate of 10%. ($5,000 / .10) =
$ 50,000.00
Most problems occur with determining the true NOI that a property produces. NOI should include everything, all expense items, except for the financing information (mortgage, payments, interest).
Be sure to compute the NOI using accurate figures, not projections of future income. Only pay for what the property is now producing - not the promise of future income.
Warning - while many investors use cap rate calculations, few will agree to the same cap rate. Some will hold out for a higher rate of return; others will settle for less. It often depends on their individual appetite for risk with each person making their own calcuations as to the potential profit (Upside) versus the potential downside (Regret) in