How the calculator works
The capitalization rate is net operating income divided by price. Net operating income is gross potential income minus vacancy and credit loss and operating expenses, before debt service, depreciation, income taxes, and capital expenditures. Value at a target cap rate is NOI divided by that rate, which is how investors and appraisers convert an income stream into a price under the income approach.
With financing, annual debt service is computed from the loan amount, interest rate, and amortization using a standard mortgage payment. Debt service coverage is NOI divided by annual debt service. Cash-on-cash return is cash flow after debt service divided by the equity invested, which here is price minus loan; it does not include closing costs, loan fees, or reserves, so your actual equity will be somewhat higher and the return somewhat lower.
Reading the results
- A cap rate is only as good as the NOI behind it. Ask whether the income is in-place rent or pro forma, whether expenses are actual or estimated, and whether the vacancy allowance reflects the lease expirations ahead.
- For NNN property, enter base rent as income and only the owner's unreimbursed costs as expenses. Our NNN properties guide explains which costs typically remain with the landlord.
- When the loan constant is higher than the cap rate, leverage works against you. In that environment, lower loan-to-value or a shorter hold may produce a better outcome than maximum financing.
- Lenders size loans to coverage. If DSCR falls below roughly 1.20 to 1.35, expect the loan amount to be reduced until it does.
Cap rates in Albuquerque and New Mexico
Cap rates vary by asset class, tenant credit, lease term, and location, and they move with interest rates and buyer demand. A single-tenant net-leased property with a national credit tenant and a long lease trades at a lower cap rate than a multi-tenant strip center with local tenants, and both differ from industrial and office. Rather than a single market number, compare a property to recent closed sales of similar assets in the same submarket. Our Albuquerque market guide describes the submarkets and asset classes; we provide current comparable sales on request.
Note that New Mexico property taxes are assessed on one-third of value times the local mill rate and can be reset after a sale, which raises expenses in year one for a new owner under a gross lease and raises tenant pass-throughs under a NNN lease. Underwrite the post-sale tax bill, not the seller's.
