How To Assume CAP Rates Like A Seasoned Investor

The “between the lines” secret to accurately determining net operating income.

Plus, you'll also learn:

  • How lease expirations affect CAP Rates.
  • What your strategy should be if the market changes over time.
  • What to do if the market isn't receptive to your asset after you've completed your overall plan.
  • What the most important thing to have in place to be profitable while you are waiting to exit.
  • and more...
 

The key to evaluating any property is to accurately determine what the current net operating income will be. Often times net operating income is based on historic operations not present or future operations.

What we like to tell our clients to focus on is the durability of the income stream meaning how long will it continue. Give me a Great Income today but if the lease is expiring within the next 24 months that will certainly not be enough time for you to be able to amortize your debt and to perform to any financial loan structure.

Once you’ve added Value to the property, either by increasing occupancy, raising rents or lowering expenses you will apply an appropriate cap rate. The caprate will likely compress from where it was before you added value, but that is not always the case.

In some instances the market will have changed over the time in which you executed your value add strategies and it’s for the very reason that we want all investors to consider two separate paths forward with acquiring any property.

Certainly you can take a look at what the value will be on sale once you have completed your strategy, however you must be equally happy continuing to own the property because the market may not be as receptive to the asset once you have completed your overall plan.

As I often tell clients it doesn’t matter the value of your property is dropped as long as the cash flow is still strong, you will be able to wait to market out until values are restored thereby creating profit while also getting the additional benefit of greater amortization to a longer hold. As well as accumulation of Cash flow.