Property listings have three general options: sell as-is, sell for its rehab potential, or sell for its development potential. Each option has a different type of buyer. The more you focus your sales pitch, the faster you close.
Why settle for one type of buyer? Agents that understand all the options of a property will diversify the pitch. Except for the zoning component, all the math is more or less the same.
How to calculate the Cap Rate of an existing property
Take the gross income from existing rent or lease and subtract a percentage for vacancy and operating expenses. The result (the Net Operating Income) divided by the potential purchase price equals Cap Rate.
How to calculate the Cap Rate based on rehab potential
Increase gross rent based on comparables (pick ones that are newer or renovated). Add rehab cost to the purchase price, and run the calculation: Gross Income minus Vac and Opex equal NOI, and NOI divided by the total cost (purchase price plus rehab) equals Cap Rate.
How to calculate the Return on Cost of development potential
The toughest part of new construction is figuring out what can be built, how tall the building can be, what types of uses are allowed, and how many units.
Once you know what can be built, the math is the same. Instead of a Cap Rate, we call it Return on Cost.
What tool can help you calculate development potential
The latest version of Deepblocks includes a zoning table (in selected cities) along with a Back of the Envelope calculation. You can model according to what is allowed, export PDF reports and send buyers a best-case scenario for the type of project they are most likely to invest in.
WATCH: Brad is a Real Estate Broker. But Brad has been losing clients lately to his nemesis, Barb, who has some cool tricks up her sleeve. Poor Brad.
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