Identifying The Equity!
Lets say I get a building with an NOI of 100k
The seller wants 500k which makes a cap rate of 20%
Can this be worth 1mil with a 10cap? for financing purposes...
How do you play with the cap in this sence?
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A friend of mine told me that in the commercial industry, you can force appreciate a property.
So lets say you purchased your property for 1mil w/ a 10cap = 100k noi.
Now lets say I increased rents, placed a laundry machine, soda machine, candy machine, etc. and I increased my NOI to 150K.
He told me that the property is then worth 1.5mil with the same 10% cap rate.
Why wouldnt the property still be worth 1mil with a 15% cap rate?
How do you play with these numbers?
The value of a commercial property is based on the net operating income that the property produces and the cap rates for that type of property in the area.. So if you increase the income or decrease the expenses, the value of the property subsequently increases. Furthermore, if the market cap rate falls, then your value goes up; if the cap rate rises, your value goes down.
To determine the value of your property you would divide the NOI by the market cap rate, say 10%. So if your NOI is 100k, and your cap rate is 10%, then your value is 100k/10%=1,000,000.
If you were to increase your net operating income to 150k by, say, increasing rents, adding a laundry room and vending machines,etc., then your value is 150k/10%=1,500,000.
Though reallize that your value is ultimately whatever a willing buyer and willing seller agree upon.
So how would I determine the neighborhoods cap rate? would I ask an appraiser or is there some kind of like-zillow service?
Now lets say I want to get hard money....
basically your saying in negotiations of purchase, increase the cap
In negotiations to finance, decrease the cap for higher value.
We have purchased many residential properties via hard money at 50% - 65% LTV... I want to create the same situation with apt complexes.
So how can I determine the LTV based on the aformentioned?
I would have a chat w/ a commercial broker. It amazing to me the cap rates, expense ratios, etc that they have off the top of their head.
Unusually high cap rates can be a red flag as well.