commercial investing

How to Use the Investment Property Valuation Calculator: Step Five

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Yesterday, myNOI covered Step 4 of the Investment Property Valuation Calculator (IPV). In the fourth step, investors found an estimated valuation of their commercial property by combing the income withe expenses. In Step 5, we’ll examine the debt taken on through your investment and the monthly payments you’ll make on your commercial real estate.

Step 5:

investmenr property valuation calculator

In Step 5 of the IPV Calculator, we’ll perform a financial analysis and take a look at the debt you’ll be incurring by investing in a commercial property.

investmenr property valuation calculator

The first information you’ll be asked for is the down payment and loan amount.

The down payment is the amount of money a buyer needs to pay up front before they can sign the building contract. Most property owners expect some form of down payment as a way to prove buyers have the capital to afford making monthly mortgage payments. The loan amount is simply how much money you’ll be borrowing to purchase the property.

After the down payment and loan amount, you’ll fill in information on Interest Rate, Amortization Period, and Monthly Payment.

The interest rate is the percent charged for borrowing assets. If the bank loaned you money, they make a profit from it by charging you an interest rate based on the total still owed.

An amortization period is the amount of time it will take you pay off the debt with fixed monthly installments. The calculator will then crunch your expected monthly payments based off the total loan and how long you will be paying it off. The finished Investment Property Valuation Calculator report will detail how much you will have left to pay off every month.

The final slots for Step 5, Annual Debt Service and Debt Coverage Ratio (DCR), are automatically calculated for you if all the above information has been filled out.

investmenr property valuation calculator

Your annual debt service is simply how much money you will need to generate yearly to cover both your repayment loans and the interest on top of them. The debt coverage ratio is determined by dividing the NOI by the debt service. Or to put it simply, how much you’ll be making by how much you’ll owe. Typically, a bank with require a DCR of 1%> before loaning you any money, as that signifies your property will generate a positive cash flow.

When you’ve entered all the values you can, hit “Go to next step” to continue valuing your property.

investment property valuation calculator

Come back Monday when we detail Step 6 of the Investment Property Valuation Calculator!

What Influences Current Cap Rates?

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Previously, myNOI covered how cap rates were calculated. Now, we’ll describe the other factors that go into determining current cap rates. 

At their simplest, cap rates are just the annual net operating income divided by the cost paid for the property. However, much more influences current cap rates than those two sums! Investors use cap rates to compare similar investment opportunities in the market by associating the risk of each with a number. Because each market is different, the best cap rate analysis looks at a number of different factors:

Location:

current cap rates traffic

The location of a commercial property influences current cap rates. Demand drives prices, and the nearer a property is to areas with lots of traffic, the higher the price. Demographics like major industries, employment rates and median household income all affect the risk associated with investing in a property.

If the area is experiencing a boom in the finance sector, then low cap rate’s for office buildings are likely to reflect a safer bet. Contrast this with a shrinking market, where high cap rates will likely show a much riskier investment for office space.

Asset Types:

It’s not just the location that influences current cap rates, it’s also the asset type of the property you’re looking for! Multifamily units are usually considered safer investments than retail properties, and so they tend to have lower cap rates. Everyone needs a place to lay their head at night, even during a recession. A retail building, however, is much riskier because of its reliance on a strong economy to remain sustainable. You can expect to see that difference reflected in the current cap rates for the different asset types.

Interest Rates:

Finally, the interest rates offered by financial institutions impact current cap rates. High interest rates mean it will likely take longer to pay back the loans you took out for the property, leading to higher risk. You may have changed nothing about your property, but if the federal government raises interest rates by 1%, you’ve suddenly got a building worth less, because of the extra money required to pay it all back.

Conclusion:

Cap rates are highly variable depending on the market, and oftentimes require you to connect with a certified local broker for an in-depth analysis. However, myNOI’s investment calculator can give you an idea of your property’s cap rate. Use our local cap rates tool to also get a bird’s eye view on your area’s current cap rates.