Quick Evaluator formula

Is there a quicker way to evaluate a property so you wont waste time during due diligence? My current formula before i dig in is to: X the cap rate by the asking or market price(after i shave off 10%) to get the NOI… then calculate my loan(25yrs @7%) and then hopefully come up with a $800-$1k+ figure after all that :banghead…is there a better way?

That sounds pretty true to form from the text books.

Being a contrarian, if at all possible, I would have the seller finance for a short term such as up to 2 years and put a performance clause in the financing. Then you can take him to task on the numbers he represented to be true. If they are not, your payments will be based upon the real numbers (performance).

Hope that helps.


That makes total since and reduces risks…I think I will adopt that concept…

upfront prove the cashflow

What are you trying to achieve? How are you coming up with your cap rate? Are you using a market driven cap rate (cap rate pulled from similar sales) or an investment cap rate derived by yourself and your investment goals?

Where are you subtracting 10% from and why? Where are you coming up with 10%? Is 10% a one size fits all for the properties you are looking at?

A one period valuation model such as NOI/cap rate = value, NOI/value = cap, cap x value = NOI is good tool to quickly analyze a property but, using a discounted cash flow model is by far superior to a one period model.

Yes, I base the subtraction(%) on the actual occupancy rate. Most Sellers will base thier asking price on a 100% occupied building(pro forma). After looking up properties on Loop.net I process the actual numbers they Ask and then… I do another quick evaluation(my offer) based on the actual occupancy. If both numbers give me enough mishap room(decent DCR & ROI) then I’ll consider faxing an offer over of the lower price to the agent to submit to the owner. Putting myself in thier shoes, they will always ask for more than they expect to actually get and knowing APTS are hard to sell its just about having a creative strategy.

How are you coming up with your cap rate?

NOI/asking price =Cap Rate

And based on the Cap rates of comparable buildings in the same area…

There are several different components to a cap rate. Using a comparable property cap rate is not the best way to evaluate properties you are interested in. While it is an acceptable approach for appraisal.

The components are mortgage cost, return on equity, growth or decline and reversion. When using a market cap of similar properties you are not taking your specific needs into consideration. Your cost of funds maybe higher/lower, your required return on equity may not be the same as the market at large, the growth expected for your property maybe different than the comparables because of age, condition, location etc., and finally the reversion you expect may need to have special conditions due to age, condition, repairs, financing, buyer credits, growth/decline etc…

I would look into how to build your own cap rate based on your investment goals. Using a market cap can lead you down the wrong path by thousands and can turn good intentions into a bad investment.

P.S. Here’s a link to a good article.


I’ll mos def look into that… but the numbers don’t lie…I don’t use it based on the pro forma numbers but the actual numbers…along with a hi and lo DCR…my goal for each property is a net of $1k for me after the debt service is paid…Can that go wrong?

I wouldn’t approach it from that angle. I haven’t heard of anyone approaching it that way but, good luck.

Yes…Its very common…Its what the banks use…I use the same formula since they are the one giving you the loan in the first place. If you need me to show it to you I can…Plus alot is based on your business credit…

I know exactly what the DCR is and what it’s function is.

I would recommend you take the first CCIM class CI 101 Investment Analysis.

I’ll check it out…I used it before and its not complicated at all…Its really bottom line…I also do at least 2-3 yrs of owner financing just in case there are some unforseen problems(which are part of my contingencies)…you never said ur formula u use; unless its a “industry secret”…lol :shocked

I like Band of Investments, Mortgage Equity Technique, 5 year discounted cash flow analysis.

The most accurate in a real world situations that allows for the most variables is the discount cash flow model. The hardest part of this model is determining your discount rate and your reversion rate.

Cool…thanks…I’ll check it out because I never heard of some of these methods…I sometimes wonder how many are out there and which ones are more commonly used than other and does the numbers all come out the same, :anon

This formula is realy very good and easy too in calulation.

It will surely helpful for the beginners in their business.


I’ll consider all but my conclusion is:


NOI-Debt Service

low DCR or 1.5 and hi DCR of 2.0 due to the economy.
(with a +$1K net)