Using Cap Rates and Net Operating Income in Real Estate Financial Analysis
Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.
This is an excerpt from CFI’s Real Estate Financial Modeling Course. We will begin our real estate financial analysis by calculating the net operating income (NOI). Below are some assumptions for the real estate model:
Now, we will perform a sensitivity analysis on the suburb property values, based on the gross monthly rent ($/sq ft) and cap rate.
6. First, we need to link the suburb property value/sq ft to the top-left cell of our sensitivity analysis table.
7. Then, we need to input a range of values for the per sq ft suburb monthly rents and the cap rates.
8. Now, we will show the suburb property value/SF in the middle of the table using the Data Table function. Select the entire sensitivity table, press ALT + A + W + T to open up the Data Table window. For row input cell, select the Suburb Gross Rents ($/sq ft/month) which is $3.00. For the column input cell, select the Cap Rate for Suburb which is 5.0%. Press OK.
9. The sensitivity table is now filled in, showing the range of values based on different rental rates and cap rates for this property.
10. We now will build a chart that graphs the relationship between the gross rental income and the cap rate. Go to Insert and select a Scatter Plot. Right-click on the chart and choose “Select Data.” Add a new series, type “Property Value/Sq Ft” for series name. Select all Gross Rents for X values and Cap Rate for Y values. Click OK.
11. You can fit a trendline to show the linear relationship between cap rate and gross rent.
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:
Below is a break down of subject weightings in the FMVA® financial analyst program. As you can see there is a heavy focus on financial modeling, finance, Excel, business valuation, budgeting/forecasting, PowerPoint presentations, accounting and business strategy.
A well rounded financial analyst possesses all of the above skills!
Additional Questions & Answers
CFI is the global institution behind the financial modeling and valuation analyst FMVA® Designation. CFI is on a mission to enable anyone to be a great financial analyst and have a great career path. In order to help you advance your career, CFI has compiled many resources to assist you along the path.
In order to become a great financial analyst, here are some more questions and answers for you to discover:
Take your learning and productivity to the next level with our Premium Templates.
Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI's full course catalog and accredited Certification Programs.
Already have a Self-Study or Full-Immersion membership? Log in
Access Exclusive Templates
Gain unlimited access to more than 250 productivity Templates, CFI's full course catalog and accredited Certification Programs, hundreds of resources, expert reviews and support, the chance to work with real-world finance and research tools, and more.