Author Topic: Running the Numbers at a Discount?  (Read 628 times)

bpleshek

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Running the Numbers at a Discount?
« on: August 09, 2016, 08:26:15 AM »
Greetings,

I am the owner of a couple of rental properties and I am about to make decide whether to make a deal or not.  I'm familiar with CAP rates, NOI, GPI, etc.  Here's the issue.  My current properties were acquired the "traditional" way trying to make a bit of profit by buying under market rate, but since I was buying from an individual, I would get it at around 90% or so.  I have an opportunity to purchase a property from a bank.  It is way below market value including my estimates at repair.  I already own property in the general area so I am confident about the rental values and the ability to get people into the property.  I am wondering about how to calculate the normal numbers.

The property is going for about $60k.  My estimates are that it will take about $15k-$20k to bring it up to the condition of the rest of the block if I were to hire it out.  Maybe $5k-8k if I do it myself.

When trying to evaluate the property for comparison(the bank owns a few), do I use the sale price or the neighborhood comp prices?  This house fully fixed up would be worth about $115k-$120k.  Rents in the area go for about 1000-1200/month.  So is my cap rate (12k-taxes & ins)/(price + repairs) or is it (12k-taxes & ins) / 115k ?  Do I use the estimated value of the property or the sales price?  I.e. do I get "credit" for my instant equity in all these calculations?

Since I'm purchasing only with cash, my cash flow = NOI. 

Also,

Thanks,

Brian

Enigma

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Re: Running the Numbers at a Discount?
« Reply #1 on: August 15, 2016, 12:47:35 PM »
The intent of the CAP (Capitalization Rate) is to give you a neutral figure for the return on your investment without outside factors such as mortgages (P&I) influencing decision.  I personally view the CAP as my income and fix it at my costs.  I do not buy a rental with the intent to sell it or get rid of the property.

Personally I have used the first cap rate (12k-(taxes & ins) - (yearly repairs))/(price + immediate repairs).

For example:
3k = yearly repairs, taxes, insurance

(12k-3k)/80k = 11.25% CAP of your investment