Page 91 - Trump University Commercial Real Estate 101

Ho w to Read a Deal

brokers and ask what the cap rate is for your general type of property.
Armed with that information, you can now solve the equation just
mentioned for property value.
Let ’ s say you have an industrial building that is bringing in
$ 342,000 in NOI. You talk to a couple of commercial brokers and fi nd
out that industrial buildings similar to yours in age and condition are
selling at around an 8 cap.
That means:

$ 342,000

$ 4,275,000 ________

.08
Is that THE value of the property? Probably not. But it might be
one good estimate.
Cost Method
This is the least - used method. However, it does work well when a
property is new or almost new.
When using the cost method, first determine the value of the land.

Do that by using the comparable method for similar parcels of land.
Then estimate what it would cost to construct the existing building. If
the property was built some time ago, you must factor in elements
such as obsolescence. Today properties are constructed with more

energy efficiency in mind, and they are prewired for lots of technology.
Buildings that are only a decade old may not have such features.
This method can still be useful, though. When I started to buy
small commercial properties in a worn - out blue - collar city, everyone
told me I was crazy. But I didn ’ t care, because I had run two simple
calculations — I knew these properties generated good NOI, and
I would be buying the properties well below replacement cost.
I scooped up as many of those properties as I could while the
market was soft. In a few short years I was rewarded handsomely when
my cash flow and values tripled.

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