Why a Value-Add Strategy Works Commercial real estate is valued through a simple mathematical formula. All investors use this to evaluate a property. This is the standard in the industry and is the way it is taught by
everyone from articles like this one to podcasts, mentoring groups, and even classes at prestigious universities.
NOI is Net Operating Income. This is all of the property’s income minus all of the expenses. NOI / Cap Rate = Value
High Demand = Lower Cap Rates
Lower Demand = Higher Cap Rates
Cap Rate is a metric used to evaluate different pieces of real estate under the same terms in order to make an “apples to apples” comparison. It removes the financing component and assumes
that a property is purchased on an all-cash basis. This way, investors understand a property’s performance regardless of financing.
WHAT IS FORCED APPRECIATION? I like to invest in deals where I can make improvements to the property that I know will increase the value right away rather than hoping that forces beyond my control turn out to be good for me. I invest in deals where I can affect changes to the property and increase the NOI myself. If the NOI is increased, then the value of the property is forced up—hence the term “forced appreciation.”
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