I am a bit confused on buying cap rate. Is 10 cap better buy than a 6 cap when you buy.Do you want to buy lower or higher cap rate?-thx
Yes, you want to buy at the highest possible CAP rate. Using $100,000 as the net operating income, the calculation is as follows:Net Operating Income / CAP Rate10 CAP: $100,000 / .10 = $1,000,0006 CAP: $100,000 / .06 = $1,666,667Frank Galenelli wrote a very good book on real estate specific calculations. I would recommend reading that book before investing any money in real estate. The book is called, “What Every Real Estate Investor Needs to Know about Cash Flow.” You can pick it up on Amazon for about $9.
Charles,Thanks I thought so but sometimes it was confusing to what exactly someone was saying about it at times.I assume Cap Rate=NOI divided by Cost of Park Park I am considering is $61,200 yr NOI $455,000 purchase cash price with $45 rent increase immediately put in place. purchase at 13.4 cap correct?
That’s correct. 13CAP with upside is definitely the kind of deal you want.
Keep in mind the higher the cap rate, usually more risk. Ex. Private utilities and low occupancy. But there are good deals hidden out there if you look in the right places.
I might add that what makes this business interesting is that the pricing sometimes follows no more mathematical methodology than some price that mom & pop had in mind on a whim. I don’t think that there’;s any other real estate sector that has this issue, as most are no longer owned by moms and pops, but rather people who are more enlightened and own calculators. We’ve bought deals that were perfect and still priced at 15% cap rates because the seller “wants a million dollars” because it sounds good and for no other reason.
I want to add you need to value the entire deal and do not get caught up on any one factor. There are 1 CAP parks I would buy in a second- and I have walked away from a few deals that were better than 20 CAP. A on 1 CAP deal with the right upside is a great buy- and a 20 CAP deal with environmental issues, or location issues is a deal killer.
Jim:Correct. Park has new infrastructure… all new complete schedule 40 sewer system (they had a main back up in several homes and a plumber convinced owner to replace entire clay sewer), all new underground wiring racks ready for both mobiles and rv’s. City provides wireless meters and park installs them. Asphalt roads are like concrete with excellent drainage , hands off, no harassment from city hall.