What Is The Definition Of Cap Rate, And Why Does I

In commercial real estate, cap rate, or capitalization rate, is used to determine the values of income producing properties such as apartments of five units or more, office buildings, strip malls and other such properties. The cap rate can represent extremely different things to different people in respect to their interests in commercial real estate. Before we investigate why cap rate matters, and what it means to specific people, let's look at the actual equation and see how it works.

Cap rate has two main components which area: net operating income (NOI) and price or estimated value of the property. NOI is found by subtracting all expenses from the gross income of the property. When the NOI is divided by the price or value of a property, you are left with the cap rate.

You can move the components of cap rate around in order to determine each of the variables in the equation. The different equations used to determine any of the three variables are below:

NOI Cap rate = -------- Price

NOI Price= ---------- Cap Rate

NOI = Value x Cap Rate

As you can see, depending on the information you have regarding the property, you can determine any of the three variables.

That's great, you say, I can determine these three variables! But how does it affect my commercial real estate endeavors?

To show the main differences between cap rates, I am going to divide investments into three major categories:

Safe investment: Cap rate of 5% Average investment: Cap rate of 10% Risky investment: Cap rate of 20%

What the buyer wants out of the property determines what a buyer is looking for.

For example, property being sold at a 5% cap rate is often characterized by low vacancy percentages (less than 5%-10%), beautiful property grounds, good management, up to date amenities, and rents or leases priced at market rate. There is a positive and strong cash flow every month because the property is operating at its full potential.

This property's value is greater when operating at peak performance, so a higher price is asked by the seller, making the cap rate lower. Those who buy at low cap rates are often looking for retail, already performing property that brings in a steady cash flow every month. A buyer such as this is often part of a REIT, or real estate investment trust, or a professional, such as a doctor or lawyer, who wishes only to deal with good properties and watch the cash flow in.

A property being sold at a 10% cap rate is often characterized by higher vacancies (around 10%-20%), average grounds, an average management team and average amenities. There is definitely some room for improvement with these properties. A buyer who picks up a property like this is looking to make those improvements by increasing rates, renovating and fixing up the property, as well as employing a well operating management team.

The sole purpose of this type of buyer is to create value in the property where it is lacking. It does take some work, and is more risky than the 5% cap rate property, so the asking price is less. Hundreds of thousands of dollars can be created in this difference between an average and good operating property.

A property being sold at a 20% cap rate, or more, is usually considered a very distressed property with vacancies of 20% and more, rundown grounds, old buildings that are falling apart, a poor management team and even a problem owner. Because of the risk, low operating income and problems with the property, a person who is willing to undertake such a property must not be afraid of a little (or much) work and the risk involved in attempting to turn a property of this type around.

However, there are hundreds of thousands, sometimes millions of dollars to be made in these properties! It takes a keen eye and some varied and creative scenarios to determine if the property will perform as you expect it will.

As you can see, the cap rate can be great for one person, and horrible for another, depending on the type of investor the buyer is!

As a seller, the seller wants to sell the property at the lowest cap rate possible because that means it is being offered at the highest price possible. It definitely depends on the condition of the property, operating income, expenses, vacancies and management team to determine what the seller can get for the property. The market will dictate what the right price is for a property.

Cap rates are considered the best way to determine the value of a property. Remember that a bank, or other type of lender, will be looking at the NOI of a property compared to the debt in order to determine if it is a safe investment for the lender. To a lender, the debt coverage is more important than the cap rate. However, if you can get the cap rate higher by getting a lower purchase price, then you can get a smaller loan, and possibly be able to cover the loan with the current NOI. It is a matter of working the numbers to see if a deal is feasible.

When you investigate commercial properties, use the cap rate to determine if the subject property fits your specific criteria. Always create future scenarios and manipulate the property's income and expense sheets to determine if you can get the money out of the property that you hope to get.

Gold mines can be found in higher cap properties, so check it out and see what you can discover in your own community.



Posted by Deborah Glomb on December 13, 2008 at 12:00 AM

About Deborah Glomb
Deborah Glomb is affliated with DEBORAH GLOMB REALTY, which is located in Ocala, FL. For further assistance please use the contact information located on the right.



Bookmark and Share
As of 05/22/12 the Deborah Glomb RePage is ranked at 3,455 with 420 points.


Local Information for Ocala, FL

Latitude: 29.187704 -- Longitude: -82.130613


ZIP Codes for Ocala, Florida 34470  34471  34472  34473  34474  34475  34476  34477  34478  34479  34480  34481  34482  34483 
Area Code for Ocala, Florida 352
Time zone for Ocala, Florida EST



Other Area Cities:   Ocala, FL  Belleview, FL  Silver Springs Shores, FL  Summerfield, FL  Lady Lake, FL  The Villages, FL 

Enter our Photo Sweepstakes and Win $200 for your Ocala photos!

To see random photos for other cities Click Here.

Submit your photos of Ocala and become eligible to win $200. Click Here for details.





Ocala is located at 29°11'16?N, 82°7'50?W (29.187704, -82.130613).GR1 According to the United States Census Bureau, the city has a total area of 100.1 km² (38.6 mi²), all land. The surrounding farms are famous for their thoroughbred horses, in terrain similar to Kentucky bluegrass. Ocala is also known for nearby Silver Springs, Florida, site of one of the largest artesian spring formation in the world and one of the earliest tourist attractions in Florida. Several major highways pass through Ocala, including Interstate 75, U.S. Highway 27, U.S. Route 301, and U.S. Highway 441. Ocala was on the Western leg of the historic Dixie Highway. In Florida there is a saying, "The North's in the South and the South's in the North". Because of this Ocala is considered by many Floridians to be where the "South" starts. -- Source: Wikipedia.com




Florida 2000 Census Population Profile Map

Ocala Florida United States
Population 45,943 15,982,378 281,421,906
Median age 39 38.7 35.3
Median age for Male 36.4 37.3 34
Median age for Female 41.4 40.1 36.5
Households 18,646 6,337,929 105,480,101
Household population 42,683 15,593,433 273,643,273
Average household size 2.29 2.46 2.59
Families 11,282 4,210,760 71,787,347
Average family size 2.91 2.98 3.14
Housing units 20,501 7,302,947 115,904,641
Occupied units 18,646 6,337,929 105,480,101
Vacant units 1,855 965,018 10,424,540

Visit US Census




Ads from Infignos.com

The Leader Spanish Real Estate


Headquartered in La Zenia, on the Costa Blanca, The Leader Real Estate helps international property buyers from all over the world. We have the very best customer-focused sales people covering the ground in all areas of Spain. Headquartered in La Zenia, on the Costa Blanca, The Leader Real Estate helps international property buyers from all over the world. We have the very best customer-focused sales people covering the ground in all areas of Spain.
Entered/Updated: August 28, 2011
Record Number: 1.



ATF Forex Trading


ATF Forex Trading provides realtime forex signals on short term positions (swing trading). Our company is dedicated to the Forex market with a strategy based on swing trading positions. We focus on steady gross performances rather than agressive and high risk trading. The service is provided through a monthly subscription with a 10 days trial period. ATF Forex Trading provides realtime forex signals on short term positions (swing trading). Our company is dedicated to the Forex market with a strategy based on swing trading positions. We focus on steady gross performances rather than agressive and high risk trading. The service is provided through a monthly subscription with a 10 days trial period.
Entered/Updated: July 27, 2011
Record Number: 2.



Lingerie & Perfumes


Buy beautiful stylish, sexy lingerie, designer perfumes, aftershaves, giftwear and Ink cartridges Buy beautiful stylish, sexy lingerie, designer perfumes, aftershaves, giftwear and Ink cartridges
Entered/Updated: March 8, 2011
Record Number: 3.


Wedding Singer


Wedding singer & DJ packages are provided across the UK. Wedding singer Luca & DJ Sally offer unique live wedding entertainment & tailored wedding music. Online audio demos available. Wedding singer & DJ packages are provided across the UK. Wedding singer Luca & DJ Sally offer unique live wedding entertainment & tailored wedding music. Online audio demos available.
Entered/Updated: February 9, 2011
Record Number: 4.


QROPS


Offers advice and information on QROPS pension transfers and solutions. Advising on all providers in the HMRC qrops list. Independent, impartial and unbiased advice. Service for individuals and financial advisers. Offers advice and information on QROPS pension transfers and solutions. Advising on all providers in the HMRC qrops list. Independent, impartial and unbiased advice. Service for individuals and financial advisers.
Entered/Updated: February 6, 2011
Record Number: 5.


The category for this RePage is Real Estate.
This includes the following sub-categories: Air Conditioning Contractors & Systems Apartments Appliances-Major Dealers Appraisers Architects Asphalt & Asphalt Products Bathtubs & Sinks-Repairing & Refinishing Beach Front Home Beach Homes Beach Vacation Homes Builders Building Contractors Building Materials Burglar Alarm Systems & Monitoring Business Brokers Cabinet Makers Carpenters Carports Ceiling Cleaning Chimney Cleaning, Building & Repairing Closets Designing & Remodeling Commercial Property Current Mortgage Rates Drapery & Curtain Cleaners Electric Contractors Fence Financing Fire & Water Damage Restoration Fireplaces Floor Laying Refinishing & Resurfacing Floor Waxing, Polishing & Cleaning Furniture Cleaning Gas Companies Gas Line Installation & Repairing Heating Equipment & Systems-Cleaning & Repairing Home Inspection Services Home Loans Home Mortgage Home Plans Home Repairs & Maintenance Services Homes For Rent Homes For Sale House Plans Insulation Contractors Insurance-Fire Insurance-Flood Insurance-Homeowners Insurance-Property & Casualty Investments-Real Estate Land Companies Landscape Consultants & Designers Locks & Locksmiths Maids' & Butlers' Service Mls Mobile Home-Parks Mobile Home-Renting & Leasing Mortgage Calculators Mortgage Lenders Mortgage Rates Mortgage Refinance Information Mortgages Movers Paint Patio Builders Paving Materials Pest Control Services Plumbing Drains & Sewer Cleaning Pressure Cleaning Service Properties Real Estate Appraisers Real Estate B2B Services Real Estate Brokers and Agents Real Estate Developers Real Estate Information Real Estate Management Real Estate Rental Services Real Estate Schools & Courses Reverse Mortgage Roofing Contractors Septic Tanks & Systems-Cleaning Shopping Centers & Malls Siding Contractors Sod & Sodding Service Steam Cleaning-Industrial Surveyors-Land Swimming Pool Contractors, Dealers & Designers Townhouses Wallpapers & Wallcoverings .

Deborah Glomb - DEBORAH GLOMB REALTY
Deborah Glomb
DEBORAH GLOMB REALTY


3850 SE 58th Ave.
Ocala, FL 34480

VOICE: 352-624-3151

FAX: 352-624-3926

TOLL FREE:
877-428-9352



 Here are some of my
favorite links:

New Quest City
Buyers USA Relocation
Realty Directory
Infignos.com

To send this page to a friend:
Click Here!




Getting Back Your Life E-Book




To create your RePage visit www.RePagesOnline.com. Serving businesses in the US and around the globe.

Another site by

Links


Disclaimer: Buyers USA Relocation does not necessarily endorse any of the businesses listed on this site. These participant profiles, blog entries are provided here as a courtesy to our visitors to help them make an informed decision. Buyers USA Relocation does not warrant the accuracy of any information presented on this site. Users of this information do so solely at their own risk and agree to hold Buyers USA Relocation harmless for any consequences arising from such use.

© 2001- 2012 Buyers USA Relocation. All Rights Reserved.
Buyers USA, Buyers USA Relocation, New Quest City, RePages, RePagesOnline.com, Homebuyersusa.com are services marks of Buyers USA.

Number of Visitors: 372868 Last Date Visit: 05/23/12