Page 84 - Trump University Commercial Real Estate 101

TRUMP UNIVERSITY COMMERCIAL REAL ESTATE 101

Tools to Calculate Value

You need to know two key calculations to determine the value of a
property: the capitalization rate and the cash - on - cash return .
The capitalization rate is usually called the cap rate . Think of it as the
return you expect to get on your investment if you paid all cash. You cal-
culate the cap rate by dividing the NOI by the sales price. After all, you
calculate the yield on a bond, for instance, by taking your annual bond
income and dividing it by the value of the bond. Cap rates are similar.
Cap rates usually range from 6 to 12 percent. The higher the cap
rate, the riskier the property, just as the higher the bond interest rate,
the riskier the bond.
The more stable the property, the lower the cap rate. You would
naturally expect a higher return from a riskier property, right?
Riskier properties are ones that need many repairs, are in bad
areas, or were built more than 30 years ago.
Institutional investors have been known to pay very low cap rates
for properties. As a very rough rule of thumb, we usually fi nd good
deals starting at an 8 cap or better.
Here ’ s the nifty thing about cap rates: If I know I need to pay an
8 cap or better for a deal to work for me, then all I need is the NOI.
With that number, I can determine what my maximum offer should be
for the property.
Let ’ s say I have a shopping center with an NOI of $ 545,000. I now
know two of the three parts of the equation, and any kid can tell you
it ’ s possible to find the third number. All I have to do is divide the NOI

of $ 545,000 by the cap rate of 8 and out pops the $ 6,812,500:

$ 545,000 NOI
_____________

$ 6,812,500 Property Value

.08 Cap Rate
I cannot pay more than $ 6,812,500 for that property. Just remem-
ber to convert the cap rate of 8 to the decimal of .08, or your calcula-
tion will be off by a factor of 100!

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