

One of the most difficult and perplexing problems for realtors and investors is finding current Gross and Net Income Multipliers and Cap Rates. Determining the value of an income property generally involves establishing either the Gross or Net Income Multipliers, or the Cap Rate according to comparables.
There are a number of difficulties:
The Net Operating Income is probably the most widely used indicator of the building's financial performance, and is frequently used in determining the value of the property. The Net Operating Income is the cash remaining after deducting the Operating Expenses from the Effective Gross Income (EGI). There are several items, which often appear on financial statements, which must be deleted before calculating the Net Operating Income (NOI).
The
Capitalization Rate:
The Cap Rate is calculated as follows:
Cap Rate = (Net Operating Income / Market Value) x 100
Cap Rate = (NOI / MV) x 100
Example:
Net Operating Income (NOI): $239,430
Market Value (MV): $3,420,000
Cap Rate
= (239,430 / $3,420,000) x 100
Cap Rate = 7%
The Cap Rate of 7% represents the annual return before mortgage payments and income taxes on the total investment of $3,420,000.
Alternatively, if the Cap Rate can be established from comparables, we can determine the likely selling price of a property. For example, if the cap rate is 7.5 % based on comparables, and the Net Operating Income (NOI) for the building is $105,000 , the potential selling price can be calculated as follows:
MV =
(NOI / Cap Rate) x 100
MV
= (105,000 / 7.5) x 100
MV = $ 1,400,000
The Net Income Multiplier (NIM)
The Net Income Multiplier (NIM) is the inverse of the Cap Rate
NIM =
100 / Cap Rate
or Cap Rate = 100 / NIM
As an example, if the NIM is 11, the Cap Rate is:
Cap Rate
= 100 / NIM
Cap
Rate =
100 / 11
Cap
Rate =
9.09%
Both the Cap Rate and its counterpart the Net Income Multiplier are used in the real estate industry to estimate the market value of a property. However, in recent times, the Cap Rate has become the more popular financial measure. Regardless of which measure is used; they both produce the same estimate of market value.
The Net
Income Multiplier is expressed as follows:
Net Income Multiplier (NIM) = Market Value / Net Operating Income
i.e. NIM = MV / NOI
Example:
Net Operating Income: $239,430
Market Value (MV): $3,420,000
NIM = MV / NOI
NIM = 3,420,000 / 239,430
= 14.28
Alternatively,
if the Net Income Multiplier can be established from comparables, we
can determine the likely selling price of a property. For example, if
the Net Income Multiplier is 7.0 based on several comparables, and the
Net Operating Income for the building is $180,000 , the potential selling
price can be calculated as follows:
MV = NOI x NIM
MV = $180,000 x 7
MV = $1,260,000.
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About
the Writer:
Ozzie
Jurock is the president of Jurock Publishing Ltd., Editor of Real
Estate Insider Publication and Author of Forget
About Location, Location, Location