When working with real estate investor clients, agents and brokers need to be able to assist them in determining the justification for the asking price of income-producing properties.
Knowing the asking price and the capitalization rate of comparable properties will allow you to help your client to determine the net income that will be required in order to justify the price paid.
Difficulty: Easy
Time Required: 5 minutes
Here's How:
- Get the capitalization rate for comparable recently-sold properties in the area.
- Multiply the capitalization rate by the value of the property to determine the net operating income that would be needed to justify the price.
Example: A cap rate for comparable apartment complexes is 12%, or .12, and asking price for the complex under purchase consideration is $300,000.
$300,000 X .12 = $36,000 in net income that would be required to justify this asking price.
What You Need
- Calculator
