Real Estate
let’s talk: CAP RATES & PRICING
| Hey Guys! Yesterday I was helping a client come up with his after repair value on a commercial flip that he is about to close on and start renovating next week Commercial properties, and properties with 5+ units are typically priced on an income basis. We knew the cap rate we were targeting, 6%-7%, and worked backwards to determine a good list price. Let’s talk about that process. So, as we do, let’s talk Real Estate, let’s talk UTILIZING CAP RATES FOR PRICING… WHAT IS A CAP RATE? Your cap rate (capitalization rate) is essentially your rate of return. How much money you will make on your cash investment. The calculation is: Net Income / Property Asset Value = Capitalization Rate HOW DO YOU USE IT TO DETERMINE LIST PRICE? So here is how we backed into this client’s list price. Step 1: Deteremine your target cap rate In the city of Philly we are seeing commercial properties sell with a 6% – 7% cap right now. Step 2: Define your scope of work We knew what he planned to do with the property, totally rehab the current the space containing 5x studio apartments, 1x 1 bedroom apartment and a storefront. This layout was based on the current zoning. Rezoning can be $$ and take a ton of time so it was advantageous to stick with what was already in place. Step 3: Forecast revenue To help us determine the estimated annual income, we looked for rental comps in the area to determine the rates for each of these units post-renovation. See my example below (p.s. these are not the actual numbers, all are purely hypothetical for demonstration purposes): Studio = $1,000/mo x 5 studios = $5,000/mo 1 Bedroom= $1,700/mo Storefront = $3,000/mo = $9,700/ mo in revenue = $116,400 in annual revenue So we now that we know the annual revenue, we need to look at the projected annual operating expenses. Step 4: Calculate Operating Expenses Operating expenses may look like the below: Insurance: ($2,500) Real Estate Taxes: ($1,500) Property Management: ($9,312) Total Operating Expenses = ($13,612) Step 5: Calculate Net Operating Income Annual Revenue: $116,400 Annual Operating Expenses: ($13,612) Net Operating Income = $102,788 Step 6: Back into property value Utilizing the cap rate formula, we can back into the list price. Net Operating Income / Capitalization Rate = Property Asset Value We mentioned before that we wanted to list at a cap rate of 6%-7% so… @ 6% Cap Rate = $102,788/.06 = $1,713,133 @ 7% Cap Rate = $102,788/.06 = $1,468,400 Hope this breakdown is helpful to all of my fellow investors out there! |
| HAPPY WEDNESDAY! Erin p.s. LET’S CONNECT ON SOCIAL MEDIA Blog: www.erinkelly.org Instagram: @erin.lindsey.kelly Facebook Page: https://www.facebook.com/ErinHomeandRE Twitter: @ErinKellyHomes LinkedIn: https://www.linkedin.com/in/erinlindseykelly/ Pinterest: https://www.pinterest.com/erinhomeandrealestate/ LinkTree:https://linktr.ee/erin.home.and.realestate p.p.s. If you are comfortable would you mind leaving me a review?! Would love to know how you are liking this blog or if you have enjoyed working together! Google Business Page Zillow Business Page |
[…] how I used this knowledge to price a commercial property for my client. Here is the post; https://erinkelly.org/2021/01/20/lets-talk-cap-rates-pricing/I think cap rates in the greater NYC area are currently 3%-4% but definitely try to do some better […]