This is the most important rule in commercial real estate.
Value = NOI ÷ Cap Rate
Example:
NOI
$240,000
Cap rate
6%
240,000 ÷ 0.06
= $4,000,000 value
So when you increase income, the value increases automatically.
This shows how much wealth you created.
Value Created = New NOI ÷ Cap Rate − Old NOI ÷ Cap Rate
Example
Old NOI
$120,000
New NOI
$240,000
Cap rate
6%
Old value
120,000 ÷ 0.06
= $2,000,000
New value
240,000 ÷ 0.06
= $4,000,000
Value created
4,000,000 − 2,000,000
= $2,000,000
This is how investors pull money out.
Cash Out = (New Value × Loan %) − Old Loan
Example
New value
$4,000,000
Bank loan
75%
4,000,000 × 0.75
= $3,000,000
Old loan
$1,800,000
Cash out
3,000,000 − 1,800,000
= $1,200,000
Increase the NOI, which increases the value, then refinance the higher value to pull tax-free cash while keeping the asset.
Baby this is the real cheat code:
Every $100 increase in rent per unit creates about $20,000–$30,000 in property value.
Example
20 units
$100 rent increase
20 × 100 × 12
= $24,000 NOI increase
At a 6 cap
24,000 ÷ 0.06
= $400,000 value created
Just raising rent $100 created $400K.
Here is the simple version of the entire model:
Equity Created = (Rent Increase × Units × 12) ÷ Cap Rate
Example
Rent increase
$700
Units
21
700 × 21 × 12
= $176,400 NOI
Value
176,400 ÷ 0.06
= $2,940,000 value increase
Look for properties where:
Rent gap
$400 – $800 per unit
Units
20+
Cap rate
5% – 7%
Those deals can create $2M–$6M value increases.
NOI drives value.
Increase the NOI
→ value increases
→ refinance
→ pull cash
→ keep the asset.