CRE Investment Formulas

Formulas you should know.

• NOI (Net Operating Income) = Operating Income – Operating Expenses
  A positive NOI suggests a profit. A negative would imply a loss.
• Cap Rate (Capitalization Rate) = Annual NOI / Cost or Value of the Property
  Cap rate is used to determine the value of income producing properties.

Example: You want to know the value of an apartment complex. You know that the cap rate for the area is 8% and the Net Operating Income for the complex is  $5,000 a month.Since you need the Annual NOI, first multiply $5,000 by 12 (months)

$5,000 x 12 = $60,000

Then take this Annual NOI and divide it by the cap rate, 8%

$60,000 / 0.08 = $750,000

The estimated value for the apartment complex, through the income approach, is $750,000.

• Cash on Cash Return on Investment = Before Tax Cash Flows / Initial Investment
  This takes into account financing on a property. It will give you a good measure of the property’s first year financial performance.

 

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