Gross vs. Net Cap Rate

All-

I have received an interview test from a small RE acquisition firm. The company primarily deals with SFR (single family rentals) and small apartment buildings. For the test, they asked me to evaluate 3 SFRs which includes determining the rental value, price we should pay, and a gross and net cap rate. I am wondering if anyone is familiar with gross and net cap rate. I have only heard of cap rate (which I assume would be gross cap rate?). Any and all help is appreciated. Thank you!

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Comments (14)

Jun 12, 2014 - 11:22pm

SHB:

I would tell them you know what a cap rate is (NOI/Purchase price) and are unfamiliar with a "net cap rate." but I would give them the cap rate net of TI/LC/Struct Reserve and assume thats what they were talking about.

TI/LC/Struct Reserve - what does that mean?

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Jun 12, 2014 - 10:00pm

I have never heard "gross cap rate.'' I've heard of an "all in" cap rate, which is the cash flow divided by the purchase price, plus any initial capex and other transaction costs.

Jun 17, 2014 - 11:51pm

Winner, Winner. Correct. Lame ass brokers use Gross Cap Rates to obfuscate the actual cap rate. Sometimes by adding all specific capital items (replacing a roof or adding some dock levelers) from your Argus projection on to the purchase price. This makes the reported cap rate lower. I've only seen it with Industrial brokers. I can't fucking stand it . The capital is included in the DCF so the net cap rate is correct unless you have real significant Year 1 capital improvements that need to be done.

Jun 12, 2014 - 10:27pm

I would assume gross and net cap rate would have to do with adjustments to the purchase price, since NOI is relatively straight forward calculation. What are the components of the purchase price you are dealing with? Any credits/adjustments to the price? Gross would include those credits/adjustments, and net would not. That's my guess. I feel like I've heard these terms before but can't remember, but using deductive reasoning I assume what I've said makes the most sense.

Jun 12, 2014 - 11:20pm

doorframeRE:

I would assume gross and net cap rate would have to do with adjustments to the purchase price, since NOI is relatively straight forward calculation. What are the components of the purchase price you are dealing with? Any credits/adjustments to the price? Gross would include those credits/adjustments, and net would not. That's my guess. I feel like I've heard these terms before but can't remember, but using deductive reasoning I assume what I've said makes the most sense.

I am trying to determine the purchase price. The property in question is in foreclosure. I am thinking of using a standard cap rate such as 8%, find NOI, and back into the purchase price from there. In terms of "finding" the gross and net cap rate I am not sure what they mean. I suppose net cap rate would be if you exclude things like utilities/insurance/maintenance - similar to a triple net lease. cap rate = discount rate - growth rate. G = rate of growth for the property and discount rate is ???.

No credits/adjustments to the price. This assignment is fairly basic with nothing too complicated.

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