Yesterday, myNOI covered Step 3 of the Investment Property Valuation Calculator (IPV). In the third step, investors laid out the expenses of their properties and could easily see which areas were impacting their bottom line the most. In Step 4, we’ll combine income and expenses to find an estimated value of your commercial property.
Step 4:
In Step 4 of the Investment Property Valuation Calculator, you’ll focus on valuing your commercial real estate property. You’ll advance from this step with a better understanding of what your building is worth and an estimation of its Cap rate.
Before you begin, it’s useful to understand a couple terms. First Net Operating Income (or NOI) is a calculation used to determine the profitability of a property. NOI is determined by adding all revenue generated from the property (rent, parking, etc) minus all reasonably necessary operating expenses (insurance, repairs, etc.)
A Capitalization (Cap) Rate is a little more complicated to figure out. A cap rate is the rate of return anticipated for one year if the property was paid for in cash — it’s the ratio between the NOI and the property value. It is determined by evaluating the financial data of similar properties which have recently sold in a specific market. The cap rate calculation incorporates a property’s selling price, gross rents, non rental income, vacancy amount and operating expenses.
Generally, buyers are interested in properties with a higher cap rate, while sellers want their cap rate to be low. You can use the slider at the bottom of the page to see how the cap rate affects the value of your property. As the cap rate goes up, your property’s value goes down.
If you’d like to learn more about cap rates, read out article for a more comprehensive explanation. Alternatively, use MyNOI’s Local Cap Rate tool to get an idea of what the cap rates may be in your area.
When you’ve entered all the values you can, hit “Go to next step” to continue valuing your property.
Come back tomorrow when we detail Step 5 of the Investment Property Valuation Calculator!