Commercial Properties Main Income from Rent
November 26th, 2008. Published under Real Estate. No Comments.
CAP RATE is short for capitalization rate. What the capitalization rate represents is how apartment properties are valued and actually all investment property is valued. Bottom line, investment real estate is valued by the cash flow or the income stream the property produces. So, unlike single-family homes where they compare a three bedroom ranch that’s 1,100 square feet to the 3-bedroom that’s 1,050 square feet that sold across the street, income property and apartment properties are different. You compare income streams, not specifically properties.
So, what is the capitalization rate? It is simply the net operating income the property produces (before any mortgage payments are made), divided by the price. For example, if I have a $300,000 property and my gross yearly rents are $60,000 and all of my expenses (taxes, insurance, maintenance, etc.) are $30,000, that leaves me with a net income end of year of $30,000. So, $30,000 divided by $300,000 is 10%. So, the capitalization rate on this particular apartment property would be 10%. Another way to look at would be this: Think of it as you are buying a business. Think of it as if you are paying all cash for this business, you are getting no loans. In my previous example, if I pay $300,000 of cash to buy this apartment building (business) and it gave me $30,000 of income after expenses, that would be a 10% return on my $300,000 cash. Remember, capitalization rates are the way that properties are valued and the benchmark that appraisers and investors need to use to gauge the value of a property.
Use your appraiser and broker strategies in the gross rent multiplier section of this to find out the same information (from the appraisers) with capitalization rates as well. In a nutshell, the higher the capitalization rate is, the higher your return in cash flow is. The lower your capitalization rate is, the lower your return in cash flow is. For example, if you have a capitalization rate of 7%, you will have less cash flow than if you have a capitalization rate of 12%. So, in a nutshell, the goal is to find a property that has the highest capitalization rate as possible. If the capitalization rate on a property is high (out of this world) and gets you really, really excited, before you go too far, take a quick look. It could mean trouble.
commerical real estate Special offer to help you make it in the commercial real estate world right now.http://www.commercialprofitblueprint.com
Jacquelyn Donner