What is the process to get an in place cap rate and HOW would it be used?
On another thread some people are claiming there is an I**n Place Cap Rate.**  I say there is no such thing and at best they are confusing that with the **IN Place NOI**.   To calculate a cap rate the formula is r=i/V  There are 2 flaws I see when people try to use this is,

1.  They cannot account for the process that they used to get the V
2. Even with a made up V the resulting Crap Rate tells you nothing.

The value of cap rates is that they report what the market is paying for NOI on a stabilized building.  The in place crap rate just tells you what an investor paid for in place NOI and the potential NOI from the excess vacancy.  So sure, you can divide in place NOI by some value but it is NOT a cap rate.  That number has no meaning because the market would need to know how much excess vacancy and what was the lost rents, your projected lease up period &amp; costs and and negotiated amount for the risk. 

Can someone explain the process and of what use it is?
[{"id": "hjyxy1k", "text": "In-place cap rate, using T12 or some alternative in-place NOI calculation, gives the buyer/lender an idea of what their immediate returns/coverage may look like. In general the \"v\" is the purchase price and ignores and capex that would be included in an as-stabilized cap rate. As-stabilized caps are all hypothetical while in-place cap rate gives you an idea of what the property is yielding day 1. Hope this helps", "replies": [{"id": "hjz47ek", "text": "&gt; In general the \"v\" is the purchase price and ignores and capex that would be included in an as-stabilized cap rate\n\nThis still begs the question of where did the purchase price come from.  Also capex is not an operating expense and would not be included in stabilized or in place NOI calculation.  \n\nSo r=i/V  You don't have r and you can't show how you got V so there is only an imaginary calculation.\n\nThanks for trying though.", "replies": [{"id": "hjz5893", "text": "Purchase price comes from where the market is for the asset type/location. Capex would be included in the \"v\" part of the calculation for an as stabilized cap rate.", "replies": [{"id": "hjzgxwm", "text": "It is a brand new building.   It just has excess vacancy.", "replies": [], "depth": 4}, {"id": "hk1icjz", "text": "&gt;Capex would be included in the \"v\" part of the calculation for an as stabilized cap rate.\n\nHow is capex included in the V part?  LOL", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hjyz443", "text": "I'm not sure you really grok cap rates or perhaps you're being intentionally disingenuous.\n\nFor everyone, the formula is NOI/Value = Cap Rate. This NOI can be an in-place NOI, an as-stabilized NOI, etc. Your cap rate will change in each scenario. If this isn't clear, suppose you have in-place NOI of $10 and stabilized NOI of $20 and you're willing to pay $500 for the building. Using in-place NOI, you get a 2% cap rate, and using stabilized NOI, you get a 4% cap. Colloquially, individuals in the CRE space will call these two figures, respectively, the in-place cap rate and the as-stabilized cap rate. You will also see them just as 'cap rate' with no further clarification, you must figure out which NOI is being used.\n\nNow that we understand how they're calculated. Let's ask ourselves 'what do they tell us' and 'how are they used?' The first answer is that they tell us broadly the risk and return in a given deal. They should be correlated with the risk of the property, so in general, riskier more volatile properties will command high cap rates. Now, how are they used? For normal properties, think not too volatile, market participants will use cap rates from similar transactions to assess the value of the property they are looking at. If the property is fairly volatile, a cap rate should not be used to value it - it does not make sense to use a cap rate, the underlying assumptions implied with using a cap rate do not work for volatile cash flow streams.\n\nThe OP falls short in thinking that cap rates are only used to determine what the market pays for stabilized NOI. This is simply incorrect. Cap rates are used for many different purposes, and looking at what people are paying for both stabilized and as-is CFs are beneficial. You act like some cap rate purist saying they must be on stabilized NOI. Not the case. You are free to interpret the figures you see how you'd like, but it's unwise to ignore other ways of looking at things.", "replies": [{"id": "hjz0rxu", "text": "&gt;suppose you have in-place NOI of $10 and stabilized NOI of $20 and you're willing to pay $500 for the building. \n\nOK, this is just all wrong.  Cap rates come from an income approach to value called direct capitalization.  The formula is V=i/r \n\nSo WHERE are you getting the V ?  See, that makes no sense.", "replies": [], "depth": 2}, {"id": "hjz1pmp", "text": "&gt;Let's ask ourselves 'what do they tell us' and 'how are they used?' The first answer is that they tell us broadly the risk and return in a given deal.\n\nCap rates do not measure risk or return.  If you tell me you bought at a 10% cap rate I can accurately tell you that you paid $10 for each possible dollar of NOI.  If you said you bought at a 5% cap rate I can accurately tell you that you paid $20 for each possible dollar of NOI.  **But** you cannot tell me in which property has the greater risk or the higher return because cap rates measure VALUE.\n\nNow I can agree that a cap rate can be indicative of risk and maybe even return.  But, novices want to think that 10% is a return but I can make the argument that the 5% cap rate will be more profitable.  You or I just can't do it with a cap rate.  \n\nThanks for trying though.", "replies": [{"id": "hk1g7ay", "text": "&gt;Cap rates do not measure risk or return.\n\nThis is not entirely true--we know that higher cap rates indicate higher NOIs relative to the value of the property. If you have two properties with the same value, but one has a higher NOI, then we can assume to a reasonable extent that there is a premium due to some underlying risk/negative factor. Therefore, the higher the cap rate, higher the risk; the lower the cap rate, the lower the risk.\n\nThe latter half of your statement is untrue. A cap rate, by definition, is a measure of NOI relative to the property's value. While it is not as accurate as ROI or IRR calculation, it is still a measure of return.", "replies": [{"id": "hk1ue5k", "text": "&gt; it is still a measure of return.\n\nHow?  In a 10% cap rate market investors are paying $10 for NOI and in a 5% cap rate market investors are paying $20.  Where is the \"return\" measurement?", "replies": [{"id": "hk2a0fx", "text": "You\u2019re not responding to the first half of what I commented so I assume you don\u2019t disagree.\n\nCap rates are not a measure of return overtime, rather a snapshot of what the return, measured as the NOI / Assumed Value of the property, as well as when there are no other expenses except what is included in the NOI, could be at the time of purchase.\n\nI do not think that the cap rate is the buyer or seller\u2019s rate of return; I do believe that the cap rate is an easily calculated indicator/metric/multiple of what the overall return will be.\n\nYour interpretation of cap rates seems to be that it measures the performance-per-dollar invested. An investor is willing to pay $X dollars for $Y income; in other words, the cap rate is measuring that tells you the income you should receive for the money invested. Basically a rate of return but backwards.", "replies": [{"id": "hk2anp7", "text": "Nope, I have posted that cap rates only measure VALUE.  The formula is V-i/r.  That tells you what an investor has paid for a dollar of NOI.  A cap rate can be indicative of risk but does not measure it.  Cap rates ONLY measure value.  In a 10 cap market a dollar of NOI sells for $10 and in a 5 cap market sells for $20.  There is no way to determine which market has higher returns or is riskier.  NO WAY!", "replies": [], "depth": 6}, {"id": "ifxn4b6", "text": "+https://m.youtube.com/watch?v=vJXsW1ER5hw&amp;t=1910s", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "hjzo91c", "text": "OP is kind of the resident subreddit .... vendor of alternate information.  I hesitate to use the T word because I think he truly does believe his own interpretation, and he is on a crusade to change the way the rest of the world values commercial real estate.\n\nBy engaging with him, you are making him hopeful that you can be converted.", "replies": [{"id": "hkl71y0", "text": "Why he hasn't been permanently banned is beyond me.", "replies": [{"id": "hklo7bx", "text": "Probably because I am posting facts instead of attacking people.  got any facts?", "replies": [{"id": "hklpygc", "text": "&gt;got any facts?\n\nYeah, here's a few:\n\nYou need to get off this forum and quit confusing people who come here to learn, thinking (without any basis), that you're somehow capable of giving them useful data.  You are not.\n\nWhile the down votes on your threads (including those outside of this thread) should *clearly* express most readers opinion of your delusional \"skill sets\", other posters in here have been excessively polite by their silence, and haven't called you on your clearly ignorant \"knowledge\" base.\n\nYou need to quit posting.  Period.\n\n**Mods**, please pull this guy from all CRE threads (*at least put him on ice*).  He is giving young students, desirous of *good* information, unadulterated polluted detritus.  He is, by virtue of any assumed authority via being able to post threads, appearing to have some kind of basis that he is uniquely knowledgeable about (***any***) CRE subject.\n\nHe is not.", "replies": [{"id": "hklv2rp", "text": "This.", "replies": [], "depth": 6}, {"id": "hkm0ae5", "text": "Geez,  all it would take is one,  just one of you to show how to value a property with excess vacancy using **IN PLACE CAP RATES!**  Just one!  Will you take the challenge?  **Mods**  Is that asking too much?", "replies": [], "depth": 6}, {"id": "hkm30ks", "text": "I\u2019m really enjoying this\n\nPopcorn.gif", "replies": [{"id": "hkmb4eo", "text": "This is a professional forum, so I shouldn\u2019t have to remind you to act professionally.", "replies": [{"id": "hkme347", "text": "What\u2019s wrong with vigorous debate", "replies": [{"id": "hkmh44c", "text": "I guess we both love it!  So are you debating that there is no such thing as an **in place cap rate** or can you debate that there is!  Let's GO!", "replies": [{"id": "hkmnbet", "text": "I told you I use divination. Sometime I go to the oracle of Delphi to ask. Ayhuausca also helps reveal the mystical cosmic truth of the in-place cap rate (but only for markets in the Southwest).", "replies": [], "depth": 10}], "depth": 9}, {"id": "hkmh7e3", "text": "This is a professional forum, so I shouldn\u2019t have to remind you to act professionally.", "replies": [], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}, {"id": "hkmb20c", "text": "This is a professional forum, so I shouldn\u2019t have to remind you to act professionally.", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}, {"id": "hkmazli", "text": "This is a professional forum, so I shouldn\u2019t have to remind you to act professionally.", "replies": [], "depth": 4}, {"id": "hvo5moh", "text": "same", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "hkmaxxr", "text": "This is a professional forum, so I shouldn\u2019t have to remind you to act professionally.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hjz8kdo", "text": "u/MathandMarketsCFA\n\nu/nnnarm\n\nand anyone else!\n\nOK, stop the word games and do some calculating'\n\n100,000 sf property\n\nMarket rents are $20 sf\n\nmarket vacancy is 5%\n\noperating expenses are 40% Kids don't do this at home.  Calculate expenses line by line and compare to market.  Also there are no variable expenses.\n\nMarket cap rate is 10%\n\nProperty is 30% occupied at market rents.\n\nBuyer expects to lease up in one year and lease up costs are $20,000  and the buyer wants $20,000 for taking the risk of buying a property not at market.\n\nHow would you get to the probable market value and what is it?", "replies": [{"id": "hk0roep", "text": "You would use a pro-forma calculation forecasting the performance of the property to find a valuation.\n\nWhile its impossible to find a perfectly accurate valuation, the assumptions that go into the pro-forma can output something close to what the reality could be.\n\nLet's say that the current occupancy rate is 30% (vacancy is therefore 70%), but the market average is 95% occupancy. So let's assume that we have a miracle and for Year 1, the property will be 80% occupied. Ignore whether you think this is realistic or not.\n\nAssume that we rent at market rents ($20 SF).\n\nThat means our potential gross income is 2,000,000, our effective gross revenue for year 1 is 1,600,000, and our OpEx is 800,000 (40% of potential gross).\n\nThat gives us a Year 1 NOI of 800,000. Now we have to project out the property performance for the next 10\\~15 years, again based on some assumptions we make about the market.\n\nSo earlier I said that we somehow got the property 80% occupied by Year 1; for the next 2 years, we assume that occupancy goes up 5% per year, until it reaches 95% occupancy in perpetuity.\n\nThis enables us to project the financials over the next 10 years; on the final year we assume something called terminal value. The further out we project, the less confident we are in our projections; 10\\~15 years is standard for institutional investing.\n\nLastly, we have to determine what our discount rate will be; because we're lazy we'll use the market cap-rate (10%). Usually we would have to calculate this based on our cost of capital, or some other method, but we will use 10% as it's an incredibly conservative discount rate anyway.\n\nThis gives us a DCF value of $7.9M. Based on our assumptions + projections, this is the number we arrive at.\n\nEdit: Just for the record, I am very aware this is an extremely oversimplified answer.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hjzgc4t", "text": "What a dumb post. You agree that there is an in-place NOI, right?\n\nSo take that NOI, and divide by the purchase price. That is the in-place cap rate.", "replies": [{"id": "hjzh4sk", "text": "It is not purchased.  What a dumb response.", "replies": [{"id": "hjzhgwa", "text": "Then you use whatever purchase price you are contemplating.\n\nNumerous institutions, brokers, lenders, etc. recognize \u201cin-place cap rate\u201d as a metric. It is hilarious that you think it\u2019s not a legitimate metric \ud83d\ude02", "replies": [{"id": "hk00c0y", "text": "&gt; It is hilarious that you think it\u2019s not a legitimate metric \ud83d\ude02\n\nWell only because no one can explain how it is calculated or what it does.  LOL", "replies": [{"id": "hk089xb", "text": "I literally explained to you the formula. You agree that you have your in-place NOI, now divide that in-place NOI over a purchase price.\n\nIf you think the deal has a low enough risk profile to go in at a 4 cap, plug in the purchase price that gets you to a 4 cap. If there is some hair on the deal and you think it\u2019s worth a 6 cap, plug in the purchase price that gets you to a 6 cap. \n\nWhat don\u2019t you understand?", "replies": [{"id": "hk0xpmz", "text": "&gt;What don\u2019t you understand?\n\nWhere you are getting your made up purchase price or the 4 or 6 cap rates.", "replies": [{"id": "hk1wuje", "text": "1) I\u2019m getting the 4 and 6 caps by comparing to other cash yielding assets. As an investor, the question is: what else can I do with my money? Corporate bonds, conventional private equity investments, stocks, etc. If you don\u2019t care about yield then you at least want your cap rate to be higher than your cost of capital, or else you will be losing money on the deal. Cap rates are also relative to each other: investors typically are willing to pay lower cap rates for lower risk deals, similar to the bond market.\n2) the purchase prices are not made up. They are using the in-place NOI and the cap rates described above.", "replies": [{"id": "hk1zfyb", "text": "&gt;I\u2019m getting the 4 and 6 caps by comparing to other cash yielding assets.\n\n??  The cap rate is just a value metric.  How are you getting a comparable yield?  The 4 and 6 cap just mean you are paying $25 or $16.67 per possible dollar of NOI.  That is like comparing the price per square foot against a bond.  There is no comparison.\n\nPlease show me how you calculated the purchase price.  It sure seems made up.", "replies": [{"id": "hk21bki", "text": "it\u2019s not made up because when you buy a property it typically has in-place noi. You agreed with that in your earlier comment. Let\u2019s say that the in-place NOI is $100, if I am willing to pay a 4 cap for that property, that means the purchase price I am willing to pay is $2500. \n\nThe calculation is simple, it\u2019s $100 divided by 4%.\n\nI can\u2019t believe you are struggling to grasp this simple concept. There is a reason everyone is downvoting you.", "replies": [{"id": "hk228r3", "text": "&gt; Let\u2019s say that the in-place NOI is $100, if I am willing to pay a 4 cap for that property, that means the purchase price I am willing to pay is $2500.\n\nHow did you determine to pay a 4 cap?  That is what y'all are missing.  I assume they paid $20,000-$40,000 for some guru course that taught them wrong and they are taking it out on me because they realize they can't answer simple basic questions that they should if they had basic understanding of direct capitalization.\n\nSo back to my question.  Why are you willing to pay a 4 cap?", "replies": [{"id": "hk22tup", "text": "Investors have return thresholds. If you have hundreds of millions of dollars, you likely have return obligations to your investors. \n\nSo, if you can buy a low risk, core deal at a 4 cap and finance it with a lower interest rate, you might be able to hit your return thresholds.\n\nIt can vary by market or asset class. For example, right now, multifamily is considered a very low risk investment in most markets because of strong demand fundamentals. As such, investors are willing to take lower returns, and therefore pay lower cap rates, for multi. I\u2019ve seen deals trade in the 2-3% in place cap rate range recently. Hotels are a different story.\n\nAlso think if it this way, if there are a lot of investors out there willing to pay a 3 cap for multifamily right now, and you need a 5 cap to hit your return thresholds, you will likely not be competitive on any deal, and be squeezed out of the market. So that\u2019s why cap rates tend to trend consistently among assets and markets.", "replies": [{"id": "hk23d98", "text": "You are avoiding answering my question.  Also a low cap rate does not mean low returns because cap rates do not measure returns.  do you understand that?  So I want to be in a market.  I am looking at a property with excess vacancy.  How do I determine the probable market value?", "replies": [{"id": "hk23i26", "text": "Of course I agree a low cap rate doesn\u2019t necessarily mean low returns. But for most assets there is a limit on how much you can lift noi, so investors who underwrite dozens of deals per week look at in place caps as a trend to where they should focus. It\u2019s obviously not fool proof, no metric is.but it\u2019s a recognized metric nonetheless.", "replies": [{"id": "hk24k35", "text": "&gt;so investors who underwrite dozens of deals per week look at in place caps\n\nNow look at the topic of this thread.  How are these investors determining the in place cap rate and how can they then use it.  All you have come up with so far is that the in place cap rate is what YOU want it to be.\n\n&amp;#x200B;\n\nBut then not one of the downvoters have been able to accomplish this either.  They are screwing themselves not me!", "replies": [{"id": "hk25kk7", "text": "It\u2019s clear that you think an entire industry of bankers, lenders, brokers, developers, operators, investors, and fund managers are wrong, and you are right. Would love to see you tell a lender that in-place cap rates don\u2019t exist but that\u2019s assuming you even do transactions to begin with, which i am starting to doubt. I\u2019ll leave you with this:\n\nYou agree that in-place NOI, as a metric, exists, right? Good. When you evaluate a commercial property to buy, you determine what you are willing to pay, make and offer, and (hopefully) make a deal, right? Good. \n\nTake that in-place NOI and divide it by the purchase price you are willing to pay.\n\nThat is your in-place cap rate. Have a good day.", "replies": [{"id": "hk26z1h", "text": "&gt;It\u2019s clear that you think an entire industry of bankers, lenders, brokers, developers, operators, investors, and fund managers are wrong, and you are right. \n\nI am not saying that.  I have no idea who you are talking about.  I'd gladly call one of these people and set them straight.  Look, the only people that talk this poppycock are on the internet.  I will agree that 95% of them think cap rates are a return, think there is such a thing as a negative cap rate and think they can use an asking price and an in place NOI to calculate a cap rate!\n\nBut I am pretty sure I am one of very few who has sat down with ownership of BILLION dollar properties and had valuation discussions.  Pretty sure there are very few that are also recognized as an expert witness for valuations.  So there is that.\n\nBut in reality it boils down to that NOT one internet or YOUTUBE person has been able to prove me wrong just like here in this thread and others.\n\nTake a few days and think about it.  talk to some of your colleagues .  Show them what I have posted.  See if even just one can prove me wrong.\n\nThanks for participating.", "replies": [{"id": "hk2999y", "text": "You said there is no such thing as an in-place cap rate. This is 100% false.\n\nIn-place NOI / Purchase price = in-place cap rate. \n\nAre you now changing your argument to \u201cin-place cap rates exist, but you can\u2019t use them to determine the return on an investment\u201d, because if that\u2019s the case then I agree!", "replies": [{"id": "hk2a5dt", "text": "&gt;Are you now changing your argument to \u201cin-place cap rates exist, but you can\u2019t use them to determine the return on an investment\u201d,\n\nI NEVER changed my argument about anything.  I actually know what I am talking about.\n\nIn your formula YOU still have the problem that you CAN NOT show how you arrived at a purchase price.  I can and have a couple of times in the other thread shown exactly how to value a property with excess vacancy and it does not involve an imaginary in place cap rate.  u/numnumlobster pretty much duplicated my calculations.  Everyone else, not so much.", "replies": [{"id": "hk2aip9", "text": "There are hundreds of ways to arrive at a purchase price. Could be a \u201cgut feeling\u201d to a full in-depth analysis to back into a return. \n\nDivide the in-place noi by the purchase price you end up at, that is how you get your in-place NOI.", "replies": [{"id": "hk2cgmp", "text": "&gt;Divide the **in-place noi** by the purchase price you end up at, that is how you get your i**n-place NOI.**\n\nSee you are actually talking in circles.  THIS HILARIOUS! \n\nGood nite.", "replies": [{"id": "hk2cp4c", "text": "Typo, that is how you get your in-place cap rate", "replies": [{"id": "hoyrsya", "text": "You are still using made up numbers.  Surely you have heard of IRV.  Now if you have the in place NOI and you want to know the value of the property HOW do you get a cap rate?  V=i/r  The goal is to value the property.  You can't do that accurately with made up numbers.", "replies": [{"id": "hp1ux7x", "text": "In-place NOI is a made up number? News to me.", "replies": [{"id": "hp2ne7d", "text": "News to me also.  Here is my first line in this thread, \"On another thread some people are claiming there is an In Place Cap Rate. I say there is no such thing and at best they are confusing that with the IN Place NOI.\"\n\n&amp;#x200B;\n\nSo you see we are in agreement about in place NOI.  Can we also agree that there is no such thing as an in place cap rate?  If not, then can you show us how it could be calculated without using made up numbers?", "replies": [], "depth": 24}], "depth": 23}], "depth": 22}], "depth": 21}], "depth": 20}], "depth": 19}], "depth": 18}], "depth": 17}], "depth": 16}], "depth": 15}], "depth": 14}], "depth": 13}], "depth": 12}], "depth": 11}], "depth": 10}, {"id": "hk22pxw", "text": "&gt; a property it typically has in-place noi. You agreed with that in your earlier comment. Let\u2019s say that the in-place NOI is $100, if I am willing to pay a 4 cap for that property\n\nSee, here is where you enter made up crap.  I have always stated that there is in place NOI.  That is factual.  I stated that there is not in place **cap rate.**  That also is factual.  Your own example show that the in place crap rate is just a number you made up.  Downvote that!  Or show me how you calculate the impossible.\n\nThanks' for hanging in.  Most people get frustrated when they realize they were taught wrong and call me a name and then disappear.", "replies": [{"id": "hk239v5", "text": "What lol? The in place cap rate is not made up. \n\nLet me ask you a simple question: when you evaluate a commercial property to purchase, you typically underwrite the deal to dictate a purchase price you are willing to pay, right?", "replies": [{"id": "hk28pwq", "text": "&gt;you typically underwrite the deal to dictate a purchase price you are willing to pay, right?\n\nNOPE!  The very first thing I want to do is determine the probable market price.  Why pay more than I have to just because it meets what I'm willing to pay.  That would be a typical novice mistake.\n\nSo yeah, THEN I would have to look at what I'm willing to pay.  It is like the idiots that say they target a cap rate of say 10.  I tell them I can sell them 10 caps all day long.  Of course it will be in a 12 cap market.  See how they shot themselves in the foot.  Or the guys that think they got a deal by how much less than the asking price they got.  OK, you got 10% off the asking but that price is STILL over market.  I love people with targets.  They just don't realize the target is on their backs!  LOL", "replies": [{"id": "hk29su5", "text": "Ok but the property eventually sells at a purchase price, right?\n\nDivide the in-place NOI by the purchase price. That is your in-place cap rate.", "replies": [{"id": "hk2b34w", "text": "&gt;Divide the in-place NOI by the purchase price. That is your in-place cap rate.\n\nNOPE!  A cap rate tells you what investors have paid for NOI.  In your example the sales price represents what the seller paid for in place NOI **and** the opportunity to increase that possibly ten fold but we don't know if the excess vacancy is 20% or 90% so even though you CAN divide in place NOI by a purchase price DOES NOT make it a cap rate.\n\nAnd I have shown everyone how you can correctly value a property with excess vacancy by using verifiable cap rate comps from stabilized properties.\n\nSeriously take my advice and really think about what I am saying.  It's 5 am here and I've been up all night and going to bed.  I'll be happy to discuss this more later.", "replies": [{"id": "hk2biui", "text": "Yes, a cap rate tells you what an investor paid for noi. And an in-place cap rate tells you what an investor paid for the in-place noi.\n\nThis is hilarious.", "replies": [{"id": "hk2c4dv", "text": "&gt;  \n&gt;  \n&gt;NO NO NO  \n&gt;  \n&gt;  \n&gt;  \n&gt;In your example the sales price represents what the seller paid for in place NOI **and** the opportunity to increase that possibly ten fold but we don't know if the excess vacancy is 20% or 90% so even though you CAN divide in place NOI by a purchase price DOES NOT make it a cap rate.", "replies": [], "depth": 16}], "depth": 15}], "depth": 14}], "depth": 13}], "depth": 12}], "depth": 11}], "depth": 10}, {"id": "hkl7a4m", "text": "The concept of \"cutlery\" and \"salad fork\" is cumbersome for him.", "replies": [], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}, {"id": "hkl76o3", "text": "&gt;What don\u2019t you understand?\n\nAny semblance of cognitive reality.", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hjziwcy", "text": "I really think people \"overthink\" a simple ratio. It is, what it is.  NOI or Value.  Just be explicit in what NOI, and Value.\n\nMy other thoughts/word-salad on the matter -&gt;\n\nhttps://www.moneyweighted.com/conceptualizing-cap-rates/", "replies": [], "depth": 1}, {"id": "hk4macf", "text": "&gt; They cannot account for the process that they used to get the V\n\nIt is whatever value the property changes hands.\n\n&gt;  The in place crap rate just tells you what an investor paid for in place NOI and the potential NOI from the excess vacancy.\n\nIf the in place cap rate tells you something, then by definition it doesn't tell you nothing. NOI on a stabilized building is obviously more expensive than NOI on a building that isn't stabilized. So then how do you quantify that discount? With an in place or pro forma cap rate.\n\nThe building doesn't have to be stabilized for you to capitalize its income into a value, and I think that is where your disconnect is. You're focused on market rates for stabilized buildings and not on valuation of value-add opportunities.", "replies": [{"id": "hk4v0vk", "text": "&gt; So then how do you quantify that discount? With an in place or pro forma cap rate.\n\nK, let's go with that.  NOW show me how you calculated it.", "replies": [{"id": "hk5g97g", "text": "I can't tell if you're being intentionally difficult about this or you just live in your own paradigm.\n\nA discount rate can be anything from WACC, inflation, expected return, etc. \n\nThe baseline is almost always WACC.", "replies": [{"id": "hk5mnn5", "text": "I am talking about valuing a property that has excess vacancy using direct capitalization.\n\nSeveral posters have said they do this using an in place cap rate but NOT ONE of them has been able to show how that is done.\n\nI say there is no such thing as an in place cap rate. There is in place NOI.\n\nI have show how it is done correctly a couple of times in this thread,  [https://www.reddit.com/r/CommercialRealEstate/comments/qp2q7a/so\\_when\\_i\\_am\\_looking\\_at\\_say\\_5\\_cap\\_rate\\_is\\_it\\_the/](https://www.reddit.com/r/CommercialRealEstate/comments/qp2q7a/so_when_i_am_looking_at_say_5_cap_rate_is_it_the/)\n\nI have been consistent and have answered any questions.  Others have ignored my questions or couldn't answer them.\n\nDo you believe there is an in place cap rate?  If so can you explain how it si calculated and of what use it has?\n\nWhat can I clear up for you?", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "hk4y2hi", "text": "&gt;They cannot account for the process that they used to get the V\n\n&amp;#x200B;\n\n&gt;**It is whatever value the property changes hands.**\n\n&amp;#x200B;\n\nUiri, I'm thinking you are not reading my posts.  I know it is hard to not be mesmerized by your own written word.\n\nPlease follow,\n\n**Big Bucks Client:**  Uiri, find me a property that is at least 50% vacant.  I plan to put my business in but don't tell the sellers that because I want a deal.\n\n**Uiri:**  Can do!\n\n**Big Bucks Client:**  Uiri, the property you brought me is perfect,  I'll be throwing all my business to your firm but I want a deal.  How do I know I'm not paying over market?  Ten million seems like a lot.\n\n**Uiri;** Oh I guarantee you that Ten million is market.  Someone just paid that much for it.  I figger we make them an offer of ten million dollars and an extra dollar!\n\n**Big Bucks Client:**  Uiri, Uiri, Uiri.\n\n&amp;#x200B;\n\nHonobob:  Bwahahahaha!\n\nYeah that is not very professional but you walked right into that!\n\n&amp;#x200B;\n\n**Uiri:** (Sitting in the mailroom)  Wut?", "replies": [], "depth": 2}], "depth": 1}, {"id": "hkko3ck", "text": "Never met any CRE investors that think Cap Rate means \u201creturns\u201d, people look at IRR, CoC, ROE etc. not sure why you keep assuming that actual investors are that stupid.\n\nThe most useful method to determine value is Comps. \n\nObviously you can say F the market and calculate Your own all-encompassing Cap Rate:\n\n(1) Take care of Debt Investor. Assume US economy stays same in near future, Jerome Powell after thinking about you all night determines that fed funds rate won\u2019t change till 23, bank underwrites yoru asset/determines credit risk profile, you end up getting 3.25% / 70% LTV / 30Y Amort / 10Y balloon.\n\n(2) Your Desired Returns. You want that 15% Equity Yield (not ROE), i.e. cash on cash return.\n(3) Other Details. 10 year hold period/ $100K NOI / 2% NOI Growth / 3% Cost of Sale.\n\nNow a few easy calculations: \n\n(1)    Project NOI with growth/hold period, and discount to PV. \n(2)    Calculate Loan constant/ Net Asset Appreciation/ Sinking Fund Factor(SFF) for the equity yield.\n\nFinally, get your **Cap Rate** with desired equity **Returns** and certain economic/property **Risks** built-in.\n\n(1)    **Cost of Debt:** 70% LTV x Mort. Constant (.052) = 3.66% (assumes interest rate where bank underwrote based on accurate credit-risk profile i.g. considering default risk under stressed conditions or deferred capex etc.)\n\n(2)    **Cost of Equity:** 30% LTV x Equity Yield (15%)  = 4.50% (you\u2019re greedy and competing against Tesla/crypto)\n\n(3)    **Equity Build-up** (from loan paydown):Loan paid down over hold period (24.84%) x 70% LTV x SFF for equity yield (4.93%) = -0.80%\n\n(4)    **Appreciation** (over hold period) : Appreciate over hold (27.67%) x SFF (4.93%) = -0.90%\n\nYour Cap Rate is ~ 6.46% which in turn results in assets value to be ~$1.55M (Value = NOI (100k) / Cap(6.46%) ).\n\nObviously tho market doesn\u2019t care, Blackrock would pay a 3 Cap for this in NYC just to park some capital blah blah blah.\n\nBut still, I just showed you how you can come up with a Cap Rate 1st and later a property value (you can still keep on complicating the model even more). So when people come up with \u201crandom\u201d cap rates, those rates more meaningful b/c they are taken from market comps/research and not a result of some academic exercise. For anyone actually investing, just spend 2 mins looking at comps. The asset is only worth what someone is willing to pay for it, and what someone is willing to pay is accurately seen from recent trades.", "replies": [{"id": "hkkqlpr", "text": "&gt;Never met any CRE investors that think Cap Rate means \u201creturns\u201d,\n\nI can make some introductions.  LOL", "replies": [{"id": "hkkr65j", "text": "haha probably, considering everything happening rn", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hkl6yp5", "text": "Here he goes again.", "replies": [{"id": "hkljcwp", "text": "How professional of you!", "replies": [{"id": "hklmiki", "text": "Dude, you need to get a grip.", "replies": [{"id": "hklnwkz", "text": "I have!  It is called reality.  Why can't you calculate a value using in place cap rates?  Asking for a friend.  LOL", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hkm9jim", "text": "I have totally baffled you!!  Sorry.  sad face.", "replies": [], "depth": 1}]