I’ve been recommending to every single reader that they check out my post on “How to value an apartment building” for six months now.
In all that time, no one noticed that I had got the equation for calculating a cap rate wrong. Here’s the relevant text with corrections:
“To calculate a CAP rate, you divide the
price of the building by its NOI NOI by the price of the building. So if a comparable building sold around the corner for $1,000,000 and it was generating $75,000 in NOI, the CAP rate can be calculated like this: $1,000,000 / $75,000 $75,000/$1,000,000 = .075, or 7.5%. Another way to think about this is: If you bought that building for $1,000,000, you would be earning $75,000 per year in profits, or 7.5% return on your money. Beats a bank account, huh?”
I didn’t notice either. A helpful reader named Jeff Daniels, who happens to be a very experienced, amazing architect in LA, pointed it out to me today. Thanks, Jeff.
Meanwhile, to the rest of you: If I write something on here that seems stupid… speak up! I write every day and there’s no editor, so sometimes there are going to be errors / omissions / etc. If something doesn’t seem right to you, that’s because it’s probably wrong, not because you’re dumb. Do what Jeff did: Email me and let me know.