Commercial & Investment Property
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In any real estate transaction, there are many costs – on top of the purchase price – that you must figure into your calculation of affordability. These extra fees, such as taxes and other additional costs, could surprise you on closing day if you’re not informed and prepared.
Some of these costs are one-time fixed payments, while others represent an ongoing monthly or yearly commitment. Not all of these costs will apply in every situation, however it’s better to know about them ahead of time so you can budget properly.
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Commercial Properties For Sale in the Buffalo Niagara Area
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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% |
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This report is not indicative of the fair market value of your home. This is just a report to show you the approximate value of your home.
This data is subject to change daily.