Posted by ray@lcorn on October 15, 2009 at 11:38:18:
In Reply to: cap rates posted by bill hughes on October 15, 2009 at 10:32:55:
Bill,
There is no such website that I know of, and if there were I would challenge the info as being bogus, as I routinely tell any broker who offers to clue me in on the "market cap rate". BS is not something I tolerate well.
The first problem in quoting caps is that I rarely meet a seller who gives a darn about my return.
But if you're going to use the cap rate to support your valuation with the seller, then the real issue is which cap rate is being quoted...
1. Based on the NOI from the property's actual operating results for the last twelve months, known as the "trailing twelve". This is the most accurate data you can get, but rarely will, and commonly used as the base scenario for #4 below.
2. Based on the NOI from the actual operating results for the last calendar year. This one should be updated for current rent roll and expenses to avoid overlooking changes in conditions that happen over a year.
3. Based on the NOI projection for the coming twelve months, assuming 100% occupancy (i.e. gross potential income) with a vacancy factor that may or may not be anything close to real conditions (typically 5%). This is the most common one in use by the general broker community and almost always overstates NOI.
4. Based on the NOI from the operating projection for the next 12 months using the current rent roll and base expenses with an escalator. This is the methodology used by CCIM brokers, and comes the closest to a fair representation of the property. But to be truly accurate, it needs to be further modified by the buyer (you) to reflect your management choices. This is known as the buyer's "going-in" cap rate.
As you can see, there is a wide variance in the NOI, and hence the valuation, you'll get depending on which method is used. Further, the "market cap" brokers love to quote is no more than a guess, because no where in public documents is the information available required for calculation of any of the cap rates. If you're going to compare to the market, the only true comp is per unit or per sq. ft., and that has to be adjusted for condition, age and obsolescence.
My position is that it is irrelevant what anybody else is paying. What matters to me is the value based on my cost of capital and desired return, using the NOI from #4 above, modified as noted, and adjusted for deferred maintenance to determine the total investment.
I wrote an article about how to do that using a derived cap rate. The direct link is http://www.creonline.com/articles/art-216.html
Also, as a shameless plug, one whole chapter of my book is on valuation, and there is a derivative cap rate calculator included on the CD that comes with it.
ray