Commercial & Investment Property
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Return On Investment Formula For Commercial & Investment Real Estate
Income = Rate (cap) x Value
Rate = Income ÷ Value
Value = Income ÷ Rate
Example 1: Solve for Value
The subject is a 12 unit apartment. The NOI (Net Operating Income) is $19,241. There is a cap rate of 9.67%. What is the indicated value of the subject?
Answer
I (income) / R (rate)
19,241/.0967 = $198,976
Example 2: Solve for Income (Net Operating Income)
The subject is an 8 unit apartment building located in a complex with 12 other similar units. Research indicates these other units selling at $30,000 per unit. The subject sold for $240,000. Research indicates a cap rate of 9.47%. What is the expected NOI for the subject?
Answer
R (rate) x V (value)
.0947 x 240,000 = $22,728
Example 3: Solve for Rate (Capitalization Rate)
The subject is a 60 unit apartment building located in a complex with 4 other similar units. Research indicates these other units selling at $25,000 per unit. The subject sold for $1,500,000. The NOI for the subject is $137,690. What is the cap rate for the subject?
Answer
I (income) / V (value)
137,690/1,500,000 = .0918 or 9.18%
Stack Formula For Investment Property
| POTENTIAL GROSS INCOME | PGI |
| VACANCY + COLLECTION | – (V+CL) |
| OTHER INCOME | + OI |
| EFFECTIVE GROSS INCOME | = EGI |
| OPERATING EXPENSES | – (OE) |
| NET OPERATING INCOME | = NOI |
| ANNUAL DEBT SERVICE | – (ADS) |
| BEFORE TAX CASH FLOW | = BTCF OR ROI |
| INCOME TAXES | +/- FIT + SIT (Federal Income Tax & State Income Tax) |
| AFTER TAX CASH FLOW | = ATCF |
Example:
Subject property is an 8 unit apartment building with monthly rents of $6,065 per month. The vacancy rate is 5%. The building collects $150 per month from the laundry machines. The debt service outstanding is $3,000 per month and has monthly operating expenses of $1,703 per month.
1. What is the net operating income?
2. What is the cash on cash return?
3. What is the cap rate?
Solution:
| Potential Gross Income | $6,065 x 12 | $72,780.00 |
| Less Vacancy | 5% x $72,780 | $(3,639.00) |
| Plus Other Income | $150 x 12 | $1,800.00 |
| Equals Effective Gross Income | $70,941.00 | |
| Less Operating Expenses | $1,703 x 12 | $(20,436.00) |
| Equals Net Operating Income | $50,505.00 | |
| Less Annual Debt Service | $3,000 x 12 | $36,000.00 |
| Equals Before Tax Cash Flow | $14,505.00 |
Answers:
| 1. Net Operating Income NOI = | $50,505 |
| 2. Return on Investment or Cash on Cash = | $14,505 |
| 3. Capitalization Rate = | .0878 or 8.78% |