Cap Rate Confusion
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Cap Rate Confusion (by Jeff [CO]) May 21, 2019 6:49 PM
       Cap Rate Confusion (by Johnny B. [MA]) May 21, 2019 7:28 PM
       Cap Rate Confusion (by Tim [IN]) May 21, 2019 7:54 PM
       Cap Rate Confusion (by GKARL [PA]) May 21, 2019 8:33 PM
       Cap Rate Confusion (by Oregonwoodsmoke [ID]) May 22, 2019 9:57 AM
       Cap Rate Confusion (by Dave [MO]) May 22, 2019 10:49 AM
       Cap Rate Confusion (by Dave [MO]) May 22, 2019 10:58 AM
       Cap Rate Confusion (by MikeA [TX]) May 22, 2019 11:03 AM
       Cap Rate Confusion (by Pmh [TX]) May 22, 2019 5:01 PM
       Cap Rate Confusion (by Pmh [TX]) May 22, 2019 5:11 PM
       Cap Rate Confusion (by Dave [MO]) May 22, 2019 10:37 PM
       Cap Rate Confusion (by Pmh [TX]) May 23, 2019 6:17 PM
       Cap Rate Confusion (by TA [CA]) May 23, 2019 11:57 PM
       Cap Rate Confusion (by Pmh [TX]) May 24, 2019 5:24 PM
       Cap Rate Confusion (by Busy [WI]) May 25, 2019 7:51 AM

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Cap Rate Confusion (by Jeff [CO]) Posted on: May 21, 2019 6:49 PM
Message:

Can anyone explain how this works? Let's say a $1,000,000 building has an NOI of $50,000, so the Cap rate is 5%. Not bad. On another $1,000,000 building the NOI is $60,000, so the Cap rate is 6%. What is confusing is that they say that a higher cap rate means the property is in a less desirable are and/or is a higher risk. Can anyone explain what that means? I know in tight markets like NYC is is usually less than 4%.

--76.120.xx.xx




Cap Rate Confusion (by Johnny B. [MA]) Posted on: May 21, 2019 7:28 PM
Message:

It means that in general you will see higher cap rates for a building that is more management intensive and will attract a rougher class of tenant. For example, if you buy a class A building you will generally see a lower return on investment than a class C building (return on investment in the sense of net rental income). The class C building will be more work to manage and own, but you will generally be compensated more for the effort. --24.147.xx.xxx




Cap Rate Confusion (by Tim [IN]) Posted on: May 21, 2019 7:54 PM
Message:

Your low cap properties are going to be NNN properties. Think McDonald's, Auto Zone, CVS... You own the property, you know the check the is there monthly. We'll run business. Those mom and pop stores... You better get a better rate. They are one bad month away from belly up. Then empty unit...

This low cap rates... They want a tax write off now and appreciation. Not looking for cash flow. Or it's 1031 money and bank is paying nothing, stock market is risky, and they want somwthing solid with a monthly check. --73.22.xxx.xxx




Cap Rate Confusion (by GKARL [PA]) Posted on: May 21, 2019 8:33 PM
Message:

Unlike stock markets, real estate markets are inefficient in the sense that information doesn't filter to all places in the market. So that means that stuff can get mis-priced. I'd argue that a 1% delta on cap rates on similar property means that one is simply mis-priced. There are some situations where higher cap rates are a function of more risk as Johnny points out. Low cap properties are akin to growth stocks that pay no dividends; the investor is looking to capital appreciation rather than current income. I prefer both income and appreciation and if I have to chose, I'll take income. --209.122.xx.xxx




Cap Rate Confusion (by Oregonwoodsmoke [ID]) Posted on: May 22, 2019 9:57 AM
Message:

A high cap rate doesn't mean "bad property". It is the other way around. A bad property won't sell unless there is profit for running it, so it will only sell at a high cap rate.

It's my understanding that cap rate doesn't take mortgage expenses into consideration. So I am not sure that it is the same as ROI.

It's been my experience 100% of the time that the cap rate given by the seller is a lie and many expenses have been left out of the calculations. You have to do your due diligence and figure out the cap rate for yourself. --98.146.xxx.xxx




Cap Rate Confusion (by Dave [MO]) Posted on: May 22, 2019 10:49 AM
Message:

To calculate a CAP rate. Add the total rent for a year, subtract taxes, insurance

--108.243.xxx.xx




Cap Rate Confusion (by Dave [MO]) Posted on: May 22, 2019 10:58 AM
Message:

To calculate a CAP rate add the total rent for the year, then subtract taxes, Insurance, maintenance, vacancy factor, management fees, from gross rents, this will give you a net number that will be divided back into the purchase price, which will be a percent of return on investment. The older the structure the higher CAP rate you would be looking for, newer won't be as high.

CAP rate will have nothing to do with how much money you put down on your investment. --108.243.xxx.xx




Cap Rate Confusion (by MikeA [TX]) Posted on: May 22, 2019 11:03 AM
Message:

CAP rate is just math. People then try to explain why one property is higher than the other. Ask 10 people why and you are likely to get 10 different opinions. It's best to do your own due diligence. You may find any number of reasons from overstated CAP rate (not including all expenses), deferred maintenance, location, etc.

I have never understood why people invest in these markets at 4%. There are other markets that consistently bring in 2-4X that, you just have to expand your geography a little. --50.26.xx.xxx




Cap Rate Confusion (by Pmh [TX]) Posted on: May 22, 2019 5:01 PM
Message:

cap rate is potential return. we as investors want a higher cap rate rather than a lower rate. ceturis paribas. --104.218.xxx.xx




Cap Rate Confusion (by Pmh [TX]) Posted on: May 22, 2019 5:11 PM
Message:

Dave: age of property is irrelevant. is determined on income over purchase price. or can be calculated on mkt value. usually done on purchase price. --104.218.xxx.xx




Cap Rate Confusion (by Dave [MO]) Posted on: May 22, 2019 10:37 PM
Message:

Yes as far as the mathematical calculation you are correct, however not to be confused with good business principals. --173.216.xxx.xxx




Cap Rate Confusion (by Pmh [TX]) Posted on: May 23, 2019 6:17 PM
Message:

Dave: as a Corp Controller b4 the investor I work for buys hotels I run cap rates as part of the investment decision regardless of age so not sure what good business principals you refer to (?) nor have I ever considered age of property when I buy a rental when I run the $ --70.119.xxx.xxx




Cap Rate Confusion (by TA [CA]) Posted on: May 23, 2019 11:57 PM
Message:

If you have two properties that net $50k after expenses a year, one sells for $500k, and one sells for $1m, the cap rates are 10% for the lower cost, and 5% for the higher cost. This is what is meant by higher cap rates are less desirable. --73.15.xx.xxx




Cap Rate Confusion (by Pmh [TX]) Posted on: May 24, 2019 5:24 PM
Message:

TA: cap rates are part of the investment decision for buyers. not sellers. --107.77.xxx.xxx




Cap Rate Confusion (by Busy [WI]) Posted on: May 25, 2019 7:51 AM
Message:

One of the speakers at convention, Charles Dobens gave an excellent presentation about Anatomy of a Multifamily Deal. He has a training package by the month for further information. I thought of this post, Jeff, as he went over everything. Might be worth it for you to sign up while there are convention specials. I would think you might get the rates even though not here. --172.56.xx.xxx



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