(4) Appreciation (over hold period) : Appreciate over hold (27.67%) x SFF (4.93%) = -0.90% (3) Equity Build-up (from loan paydown):Loan paid down over hold period (24.84%) x 70% LTV x SFF for equity yield (4.93%) = -0.80% (2) Cost of Equity: 30% LTV x Equity Yield (15%) = 4.50% (you’re greedy and competing against Tesla/crypto) ![]() considering default risk under stressed conditions or deferred capex etc.) Constant (.052) = 3.66% (assumes interest rate where bank underwrote based on accurate credit-risk profile i.g. (2) Calculate Loan constant/ Net Asset Appreciation/ Sinking Fund Factor(SFF) for the equity yield.įinally, get your Cap Rate with desired equity Returns and certain economic/property Risks built-in. (1) Project NOI with growth/hold period, and discount to PV. 10 year hold period/ $100K NOI / 2% NOI Growth / 3% Cost of Sale. You want that 15% Equity Yield (not ROE), i.e. Assume US economy stays same in near future, Jerome Powell after thinking about you all night determines that fed funds rate won’t change till 23, bank underwrites yoru asset/determines credit risk profile, you end up getting 3.25% / 70% LTV / 30Y Amort / 10Y balloon. Obviously you can say F the market and calculate Your own all-encompassing Cap Rate: The most useful method to determine value is Comps. not sure why you keep assuming that actual investors are that stupid. Never met any CRE investors that think Cap Rate means “returns”, people look at IRR, CoC, ROE etc. You are free to interpret the figures you see how you'd like, but it's unwise to ignore other ways of looking at things. You act like some cap rate purist saying they must be on stabilized NOI. Cap rates are used for many different purposes, and looking at what people are paying for both stabilized and as-is CFs are beneficial. The OP falls short in thinking that cap rates are only used to determine what the market pays for stabilized NOI. If the property is fairly volatile, a cap rate should not be used to value it - it does not make sense to use a cap rate, the underlying assumptions implied with using a cap rate do not work for volatile cash flow streams. Now, how are they used? For normal properties, think not too volatile, market participants will use cap rates from similar transactions to assess the value of the property they are looking at. They should be correlated with the risk of the property, so in general, riskier more volatile properties will command high cap rates. ![]() Let's ask ourselves 'what do they tell us' and 'how are they used?' The first answer is that they tell us broadly the risk and return in a given deal. Now that we understand how they're calculated. You will also see them just as 'cap rate' with no further clarification, you must figure out which NOI is being used. Colloquially, individuals in the CRE space will call these two figures, respectively, the in-place cap rate and the as-stabilized cap rate. Using in-place NOI, you get a 2% cap rate, and using stabilized NOI, you get a 4% cap. If this isn't clear, suppose you have in-place NOI of $10 and stabilized NOI of $20 and you're willing to pay $500 for the building. Your cap rate will change in each scenario. This NOI can be an in-place NOI, an as-stabilized NOI, etc. I'm not sure you really grok cap rates or perhaps you're being intentionally disingenuous.įor everyone, the formula is NOI/Value = Cap Rate.
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