Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
And once you factor out your unrealistically high rent, that cap rate will likely fall into the mid 2's... or less.
Cap rates on SFHs are almost always going to be lower than those on condos because they are much more desirable to own.
1. Cap rates are set by the market. If there is a change in rents in the calculation it will generally change NOI. If NOI goes up then the property VALUE will go up NOT the cap rate. Again why would people want a "lower" cap rate over an increase in VALUE? If you can't answer that maybe that is why you've been a poor investor.
2. OK, I buy a fee simple SFR in Kalihi and you buy a Gold Coast fee simple condo. Then we trade! Ha Ha
Exactly, appraisal 101. Now speaking of "made up stuff". Where's your figgers?
Day 8
I already posted the "figgers" so please stop asking.
As for the cap rate (and your complete lack of understanding of it), it is the most important metric when buying any investment property. If you can't safely calculate the cap on a property, it shouldn't be purchased. Calculating the cap rate of a property allows an investor to determine how much debt can be included as part of the acquisition. Cap rates provide commercial appraisers the basis and foundation to their valuations. I argue cap rates with my bankers all the time. The banks want the commercial appraisers to artificially inflate the cap rate to ultimately reduce the amount of debt the bank will use to leverage the asset. The higher the cap rate (valuation by income approach) used by the appraiser, the less debt the bank will be willing to issue for that particular property. This reduces the banks' risk participation (which is what they want). If they used artificially low cap rates, the risk for the bank goes way up and they obviously want to avoid that.
Honestly, it's clear that you haven't actually been intimately involved in the financing of commercial real property. The cap rate is a very important metric but does take significant work to accurately determine. There are, of course, investors out there that buy property for the purpose of parking cash or are betting on short term appreciation (flipping) or long term appreciation vs cash flow. If you are buying for cash flow, the cap rate should always be calculated and applied to determine the return the asset will provide.
And yes, cap rates do not determine property value per se. But they do determine how much borrowed money (at X rate and terms) can be leveraged on a particular asset. Without knowing the cap rate, you could never safely calculate how much debt a property could adequately service. The more debt a property can service, the more it's worth (market). It is an extremely important calculation that is almost always inaccurate and overinflated by realtors...
Valuations will be based on the SAME cap rate unless the difference is so much that it will be considered a different asset class. Then all properties in each asset class will have basically the SAME cap rate.
For example purposes ONLY since there is no use for condo cap rates lest take a view property and a non view property.
V property will have a higher NOI because it is rented more. V NOI = 1200. Cap rates for these properties are .2%? $1200 / .002 = $600,000
NV Property will only have $1000 NOI. $1,000 / .002 = $500,000.
See? The cap rate stays the same but the VALUE changes. You are buying NOI. PEOPLE DO NOT BUY CAP RATES!
Maybe you live in a cash flow world, which is fine, but stating that there is no use for cap rates in condos is prima facie false and your examples indeed make no sense as no one would ever buy one of these condos based on cap rate alone. However there is a huge difference between cap rate being important vs irrelevant!!! Not every investor is parking money with no need for monthly return ... Otherwise you would see no investment condos being rented out, which is clearly not the case. Many vacation homes are rented out to help absorb the ownership costs.
NOI is a bit more direct metric for monthly out of pocket but the two metrics are very correlated.
Last edited by LostVector; 09-04-2016 at 01:33 PM..
Maybe you live in a cash flow world, which is fine, but stating that there is no use for cap rates in condos is prima facie false and your examples indeed make no sense as no one would ever buy one of these condos based on cap rate alone. However there is a huge difference between cap rate being important vs irrelevant!!! Not every investor is parking money with no need for monthly return ... Otherwise you would see no investment condos being rented out, which is clearly not the case. Many vacation homes are rented out to help absorb the ownership costs.
I am not sure what your point is. I stand by my statement that cap rates for condos and SFR's are irrelevant. That is basic real estate fact. A cap rate is a valuation metric. The best valuation method is direct sales comparison. Condos and SFR's are valued by comps. There is no logical reason to use a less accurate method to value a condo or SFR.
1. Please show me how my cap rate calculations and explanations make no sense.
2. Please show me "what" a cap rate does for you.
As posted earlier I am qualified as an expert witness in CA for valuations and have valued over $40,000,000,000 in properties. I thoroughly understand this subject and have deprogramed many investors that have been taught false information by Gurus.
I guarantee you that you will change your thoughts on this matter if you can follow basic logical information. If you just want to ignore factual information that is on you.
I already posted the "figgers" so please stop asking.
As for the cap rate (and your complete lack of understanding of it), it is the most important metric when buying any investment property. If you can't safely calculate the cap on a property, it shouldn't be purchased. Calculating the cap rate of a property allows an investor to determine how much debt can be included as part of the acquisition. Cap rates provide commercial appraisers the basis and foundation to their valuations. I argue cap rates with my bankers all the time. The banks want the commercial appraisers to artificially inflate the cap rate to ultimately reduce the amount of debt the bank will use to leverage the asset. The higher the cap rate (valuation by income approach) used by the appraiser, the less debt the bank will be willing to issue for that particular property. This reduces the banks' risk participation (which is what they want). If they used artificially low cap rates, the risk for the bank goes way up and they obviously want to avoid that.
Honestly, it's clear that you haven't actually been intimately involved in the financing of commercial real property. The cap rate is a very important metric but does take significant work to accurately determine. There are, of course, investors out there that buy property for the purpose of parking cash or are betting on short term appreciation (flipping) or long term appreciation vs cash flow. If you are buying for cash flow, the cap rate should always be calculated and applied to determine the return the asset will provide.
And yes, cap rates do not determine property value per se. But they do determine how much borrowed money (at X rate and terms) can be leveraged on a particular asset. Without knowing the cap rate, you could never safely calculate how much debt a property could adequately service. The more debt a property can service, the more it's worth (market). It is an extremely important calculation that is almost always inaccurate and overinflated by realtors...
1. FACT You have not provided calculations that support a 0% cap rate.
2. FACT You have not provided calculations that support a negative cap rate,
3. If the cap rate is so important in buying an investment condo please show me exactly how you use it.
4. How do you calculate a cap rate on a potential purchase without a sales price?
5. Cap rates by definition ignore financing. How does your calculating it factor in the financing.
6. How do appraisers "artificially inflate" cap rates? Cap rates are set by the market. What exactly are you arguing with your bankers about? They must think you are a loon.
7. Cap rates are used to VALUE properties (NOI). Look up income approach to value! How can you claim otherwise?
NOI is a bit more direct metric for monthly out of pocket but the two metrics are very correlated.
EXACTLY! You can calculate and use NOI on condos and SFR's without a cap rate.
BUT you cannot calculate or use a cap rate WITHOUT NOI.
There is no reason to calculate a cap rate on a condo or SFR.
Listed at $89,900, this single-family property generates $3,126 annual cash flow & 8% cap rate.
Per Jason Hartman website. He is a PRO. Cap Rate is just a measure , so calm down you 2 old foggies.
So's a yardstick ya punk whippersnapper. But if you measure using it sideways then your numbers are crap not cap! And only an internet "expert" would incorrectly use an "asking" price in the calculation. Have a little respect for your elders! Obviously yo momma didn't know how to use a yardstick. Now you kids get off my rental property's grass!
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
