Erica Gonzalez, Real estate student  (Usa)

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Rainmaker
757,892
Brian L. Sirota, Esq.
Bristar Realty (Realtor/Attorney) - Orange, CA
For Solutions: (714) 501-7660

Erica Gonzalez 

TWO METHODS TO DETERMINE VALUE ON COMMERCIAL PROPERTY

CAP RATE

 

The question you're asking is a method used for commercial property valuation, which is called the Capitalization Rate.   

 

NOI divided by the purchase price or mkt value = Cap Rate.   Looking to the NOI and Cap Rate will help determine the potential return and, thus, whether the investment is worthwhile. 

GROSS RENT MULTIPLIER

 

The other way to determine value is the Gross Rent Multiplier.   Divide purchase price by gross rent.

Apr 29, 2022 10:32 AM
Rainmaker
956,231
Candice A. Donofrio
Next Wave RE Investments LLC Bullhead City AZ Commercial RE Broker - Fort Mohave, AZ
928-201-4BHC (4242) call/text

I R V is the formula. 

I = Net Operating Income (gross minus expenses) 
R = Cap Rate
V = Value 

You can multiply or divide, depending on what you're looking for.

EX 1: NOI is 100k annually, divide by [known] cap rate 8% value is 1250000
EX 2: Value (or asking) is 500k, NOI is 25k, divide 25000 by 500000 that's a 5 CAP

EX 3: Cap rate 10% (if that's what your guy wants) value 500k, x 10% so you need NOI of 50k annually for it to pencil. 

I have answered this question soooo many times, LOL 
Keep this and you will never go wrong. 

 

 

 

Apr 29, 2022 12:19 PM
Rainer
359,967
Caroline Gerardo
Licensed in 20 states - Newport Beach, CA
C. G. Barbeau the Loan Lady nmls 324982

NOI  

Income, say it's rents then it is market rents determined by the appraiser, generally not short term rental unless is a refinance and they can prove the past two year track record.

Minus: advertising, car, commissions, contract labor, depreciation, employee benefit programs, insurance, mortgage interest, legal, office, taxes.... etc (every little line item for the year - equals the net).

Profit and or Loss - lenders use this from the last tax return to the current date. This is how we measure that a business is still making the same money as on the past two year IRS cycles. The income needs to be the same or increasing or in the evaluation process the business appears to be in trouble. The YTD (year to date) profit and or loss is not included in most income calculations for conventional and government loans. It is used in Non QM, Commercial, multifamily.  When a buyer is making an investment property purchase we also look at track record. If this is the first rental and loan is conventional the appraiser will do a rental survey which is the income number used against principle, interest, tax, insurance and HOA less a 25% haircut on the income. We want to see that the income verses the hard expenses monthly can be met with rents. Vacancy and problems occur so the 25% expense margin is for say a property manager who may charge 10% and tenants who don't pay... 

Profit and or Loss sometimes we ask for the CPA to provide verified numbers. Other times the borrower who uses quickbooks can run the current numbers from their own books. 

If property Net Operating Income is  a big loss, we may ask for larger down payment to make it work, or ask for more reserves on a different program, or say no. Call me if you need help

Apr 29, 2022 11:37 AM
Ambassador
2,821,071
Wanda Kubat-Nerdin - Wanda Can!
Red Rock Real Estate Brokered by Real - St. George, UT
St. George Utah Area Residential Sales Agent

Contact a broker in your local area that can help you Erica. The best to you in getting the answers you need.

Apr 29, 2022 10:33 AM
Rainmaker
1,071,847
Doug Dawes
Keller Williams Realty Evolution - Topsfield, MA - Georgetown, MA
Your Personal Realtor®

The NOI, net operating income (subtracting all expenses from total revenue) That's what's to put into Hip National Bank (your pocket, so to speak)

 

Apr 29, 2022 09:48 AM
Rainmaker
2,059,780
Michael J. Perry
KW Elite - Lancaster, PA
Lancaster, PA Relo Specialist

Your NOI is the amount of Income that is left to Service the Debt ( Mortgage Payment)

Apr 30, 2022 06:06 AM
Ambassador
3,176,185
Kathleen Daniels, Probate & Trust Specialist
KD Realty - 408.972.1822 - San Jose, CA
Probate Real Estate

Now that you have the formula, I hope the class also asks you to calculate as well. It is in the doing that we learn. My mother always said, not tell me, show me. 

I wish you all the best with your real estate studies. 

Apr 29, 2022 01:47 PM
Rainer
317,798
Don Baker
Lane Realty - Eatonton, GA
Lake Sinclair Specialist

Best to sit down with a broker and look at examples of real numbers to truly understand it.

Apr 29, 2022 12:39 PM
Rainmaker
2,701,495
Richie Alan Naggar
people first...then business Ran Right Realty - Riverside, CA
agent & author

The giants are out and answering up. Real meat & potatoes here. ME: I never like these formulas as my brain is simple as is my approach however, these are good to know when you need them. Keep asking questions until it gels

Apr 29, 2022 12:36 PM
Rainmaker
4,639,561
Wayne Martin
Wayne M Martin - Chicago, IL
Real Estate Broker - Retired

Brian L. Sirota, Esq. and Candice A. Donofrio have you covered. Good luck!

Apr 30, 2022 04:26 AM
Rainmaker
855,342
Olga Simoncelli
Veritas Prime, LLC dba Veritas Prime Real Estate - New Fairfield, CT
CONSULTANT, Real Estate Services & Risk Management

This is not a matter of opinion or experience. It's a textbook answer. 

Apr 29, 2022 02:38 PM
Ambassador
5,833,344
Bob Crane
Woodland Management Service / Woodland Real Estate, KW Diversified - Stevens Point, WI
Forestland Experts! 715-204-9671

Hi Erica, looks like you have some good explanations here, all the best to you on your exam.

Bob

 

Apr 30, 2022 12:42 PM
Rainmaker
1,373,975
Thomas J. Nelson, REALTOR ® e-Pro CRS RCS-D Vets
Big Block Realty 858.232.8722 - La Jolla, CA
& Host of Postcards From Success Podcast

I only use the CAP Rate method on all residential property aka Capitalization Rate - however basically same data, with more detail.

Apr 30, 2022 12:40 PM