How is the Cap Rate calculated in Valuate?

For non-Flip and non-Back of the Envelope analyses, Valuate will autocalculate 11 years' worth of cash flows upon a file being created, regardless of the Holding Period that you select.

The Year 1 Cap Rate (boxed in green in the Home screen snapshot below) is calculated off of the user's inputs for the Purchase Price and for the components of Year 1 NOI, based on this formula: Cap Rate = NOI / Purchase Price.

The Year 2+ Sale Cap Rates boxed in blue in the Unlevered Summary table are calculated by adding a 0.25% increment to the prior year's Cap Rate. To change any of the values for Year 2 through Sale Year-1, double click on the input field for the desired year and input a new value. Note that changing any one year will not cause a ripple effect in the subsequent year values i.e., the subsequent year values will not recalculate upon editing any year.

The Sale Year Cap Rate boxed in orange is initially set to be 0.25% higher than that for the year prior to the year of sale. The Forward Year Cap Rate is always set to be equal to the Sale Year Cap Rate.

For example, if you create a new file that has a Year 1 Cap Rate of 8.00% (boxed in green below), the subsequent year cap rates will autocalculate upon file creation to be as shown boxed in blue below

  • Year 2 - 8.25%
  • Year 3 - 8.50%
  • Year 4 - 8.75%
  • Year 5 - 9.00%
  • Year 6 - 9.25%
  • Year 7 - 9.50%
  • Year 8 - 9.75%
  • Year 9 - 10.00%

The default value in this example for the Sale Cap Rate, which is boxed in orange, (Year 10 since the Holding period in the Sale box is set to 10 years) will be 10.25%, a continuation of the constant 0.25% incremental growth trend of the cap rate year over year.

Note that the Sale year Cap Rate and the Forward Year Cap Year (Sale Year+1; Year 11 in this example) are equal to one another by design. To change both at once, edit the Sale Cap Rate field in the Sale box.

 

What happens when you change the Holding Period?

If you change the Holding Period input, the Cap Rates at the point of changing the Holding Period will remain as is in the new presentation of the analysis.

For example, if you were to change the above-shown analysis from a Holding Period of 10 years to 5 years, the Cap Rates will remain the same for the years that will still be displayed.

If you then revert the Holding Period from 5 years back to 10 years, the Cap Rates for the full 11 years that were in place when the Holding Period was shortened will be restored.

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Note: If a file is created for which all values related to the Year 1 NOI are zero, the Cap Rates will initially be set to be:

Year 1 - 0.00%

Year 2 - 0.25%

Year 3 - 0.50%

Year 4 - 0.75%

Year 5 - 1.00%

Year 6 - 1.25%

Year 7 - 1.50%

Year 8 - 1.75%

Year 9 - 2.00%

Year 10 - 2.25%

Year 11 - 2.25%

 

 

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