Hello New Apartment Building Investment Student,

The first skill you need to possess as an apartment building
investor is the ability to distinguish between a smart
apartment building purchase and one that will lose money.
The first step in this process involves determining the value of
the building and what rate of return you will see on your
money.

Your first lesson will teach you exactly how to determine an
apartment building’s investment value using the CAP rate.

If you are truly serious about getting started in the
lucrative business of apartment building investments then I suggest
that you order my full course today by visiting my website at

“Buy Your First Apartment Building E-Course”

Just scroll down to the bottom of the page and click order now.

Remember, the full, in-depth, course is only $79.95.

Determining the Value of an Apartment Building Investment
Using Cap Rates

Determining the value of an apartment building investment is one
of the greatest difficulties that many new commercial real estate
investors face. Most people who invest in apartments have some
experience investing in other types of real estate, typically
residential homes or duplexes and triplexes.

The issue that new investors face is the fact that apartment
buildings are valued by
different methods than residential real estate. In fact, it is
usually quite easy to find the fair value of residential estate
using a comparative sales approach. The comparative sales approach
simply uses the existing sales prices of similar residential
properties in that particular area and determines value based on
an average sales price of comparable properties. This should be
very straight forward. However, commercial real estate investors
and appraisers use a variety of appraisal methods to determine the
fair market value of an apartment building. These new methods
should not deter the new investor because once they are understood
they actually will help tremendously to locate the best
building for acquisition.

The first unfamiliar term that a new apartment building buyer
will encounter is the capitalization rate or CAP rate for short.
As the new investor is searching for an apartment building his
realtor will supply him the CAP rate of the property. The CAP
rate is a measure of the income produced by an apartment building
divided by the cost of the building.

For example: if an apartment building is purchased for the price
of $1,000,000.00 and the property produced an annual net operating
income of $100,000.00 the CAP rate of the property is 10%.
(Net operating income is gross rents minus expenses.)

Net Operating Income: $100,000.00

Purchase Price: $1,000,000.00

CAP rate = 10%

An investor can also use the CAP rate to determine the maximum
price he can pay for a property when he knows what the net
operating
income is.

For example, if the investor is looking at an apartment building
that is seeing a net operating income of $150,000.00 and he wants
to see a CAP rate of 11% he can determine the maximum purchase price
as follows:

Net Operating Income: $150,000.00

CAP Rate: 11%

Maximum purchase price: $1,363.636.00

This simple formula to devise the capitalization rate of an
apartment building is limited however. The simple CAP rate assumes
that the investor will be purchasing the property for cash and does
not take into account the financing terms that will affect the
investor’s rate of return on the building. In other words the
simple CAP rate is good number to use when comparing apartment
buildings as potential investments but a little bit more analysis
is necessary to determine exactly what the true rate of return will
be on a particular building when using financing to purchase the
property.

The goal for the individual investor is to determine what the
property is worth to him or her. In other words, the investor
should only be concerned with paying a price for the property that
allows him to realize his sought after rate of return. The best
way that I have found to determine the investment value of an
apartment building is to use the “Band of Equity Investment Method”.

The “Band of Equity Investment Method” of determining value will
tell you the maximum price that you can pay for your apartment
building and still realize the rate of return that you are looking
for. The greatest advantage of this valuation formula is that it
takes into consideration the terms of financing that the investor
is using to purchase the property. Thankfully, this method is not
that complicated and it merely requires that you know some
financial information about the property and the terms of the
financing that you will be using.

Here is how the “Band of Equity Investment Method” is figured:

Mortgage: Loan To Value of Mortgage X Mortgage Constant

= _____________________

Property: Down Payment on Property (as a percentage)

X

Desired Rate of Return

= _____________________

Mortgage: 80% (.80) X 7.99% (.0799)

= .06

Equity: 20% (.20) X 11% (.11)

= .02

.08

Cap Rate

= 8.0%

With this new “derived” CAP rate you can now determine your maximum
purchase price for any apartment building and ensure that you will
be realizing at least an 11% rate of return on your
investment. For example, you are out looking at 14 unit apartment
building with your realtor and he tells you that the net operating
is $150,000.00. You know that your bank will give you a 30 year
loan at an interest rate of 7.99%. You know that you need to see
at least an 11% return on your investment. You simply divide
$150,000.00 by your derived CAP rate of 8% and you get the price
of $1.875000. You know that you can purchase the building with a
20% down payment and a 30 year loan at 7.99% and still realize a
net return of 11% on your investment.

If you are truly serious about getting started in the
lucrative business of apartment building investments then I suggest
that you order my full course today by visiting my website at

“Buy Your First Apartment Building E-Course”

Just scroll down to the bottom of the page and click order now.
Remember, the cost for the full, in-depth, course is only $79.95.