Real Estate Investor · Walnut Creek, CA · Member since 2008 · 22 posts · 4 votes
17y
Adarrin,
That is going to depend on the geographic area and the tenants. It also will depend on what you as an investor expect to get as a return versus the risk you are taking.
For instance San Francisco, CA has a cap rate of 4-5% for multifamily buildings. In Fresno, CA you shouldn't buy a multifamily for less than a 8% cap rate.
In the current market I would suggest that you base any value calculations on today's actual income information. Proforma rents may be trending down, not up.
Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
17y
Those cap rates for residential multi-family properties are simply telling you that these properties are overpriced (by a bunch). These properties are guaranteed to bleed cash!
Rental Property Investor · Baltimore, MD · Member since 2009 · 624 posts · 559 votes
17y
If memory serves me correctly the technical definition of a cap rate is the return an investor would expect in the first 12 months of an investment if they paid all cash for that investment.
And... typically the less the cap rate the less risky the investment.
When figuring the NOI you should use your numbers just like you were managing it. So many brokers/sellers will provide setups for a property that don't represent how the property should be managed. Things like rents "could" increased and then use those rents as the income... and of course no one has maintenace or vacancies... but I can assure you, you will.
I have heard that the cap rate on a building you purchase should be at least 2 points higher then the cost of that money.
Frankly... that still wouldn't be a deal for me. I guess I like the risker stuff because I know I have the ability to upside manage it.
Commercial Lender · Ocala, FL · Member since 2008 · 60 posts · 4 votes
17y
A great CAP Rate is always said to be 10%+....but, that is the return, only if you pay all cash on the Property. Mostly, you also have a Loan against the Property, & that has to be deducted from the NOI numbers, to get your real return...& divided into your Investment is the Cash-On-Cash return.
You also want to look seriously at the underlying Business & their Financials, to make sure you will seemingly keep getting that monthly check from them.
Houston, TX · Member since 2009 · 48 posts · 11 votes
17y
Originally posted by Adarrin Smith:
WHAT IS GENERALLY A GOOD CAP RATE AND NOI FOR COMMERCIAL BUILDINGS?
Adarrin,
This is an excellent question and one that can generate several answers.
A cap rate--in the sense used in the answers here-- is the NOI for a stabilized asset over it's purchase price.
A cap rate IS NOT...
- an indicator of cash flow, only CASH is...
- an indicator of value
- an indicator of whether you should purchase
A cap rate is
- a VERY loose measure on whether to do further research on the prospective investment
- often used as jargon to sound like a good investment and cloak for cash flow...
There is also a very big difference between an unleveraged cash yield (cap rate) and a leveraged cash yield (cap rate)
An unleveraged cash yield (cap rate) is NOI over purchase price -- which includes ALL closing costs
A leveraged cash yield (cap rate) is NOI after debt service over equity (Purchase price plus closing costs less debt)
Typically (used very loosely) your leveraged cash yield (cap rate) will be higher than your unleveraged becuase of the positive leverage of debt. If that's NOT the case you are negatively leveraged, which means the cost of your debt capital is MORE than the yield on your equity capital.
Commercial Real Estate Broker · Nashville, TN · Member since 2008 · 151 posts · 46 votes
17y
THe cap rate is used simply to compare two similar income producing properties. It is the rate at which a property's income is being capitalized expressed as a percentage of the purchase price of the property.
It is a ratio used to compare one property against another, and should not be used as the sole factor in determining whether a property should be purchased.
Mathematically, it is defined by the equation:
Net Operating Income / Purchase price (or Estimated Value).
Since NOI is cash flow, your cap rate will have a direct relationship to cash flow. Holding all other things constant, if cash flow decreases, Cap rate decreases. This means that the net income (if any) is being capitalized at a slower rate compared to the purchase price or value of the property.
For instance, if one pays 1,000,000 for a property with an NOI of 100,000 the cap rate for that property would be 10%. If a similar property next door had a NOI of 80,000 with the same purchase price of 1,000,000 the cap rate would be 8%.
What that means is that the first property is capitalziing income at a rate of 10% of the purchase price per year. The second property is generating 8% of the purchase price per year. Again, holding all things equal, tenant type, quality of tenants and leases, expenses, etc. You would purchase property #1 over property #2 because it is returning a higher percentage of the purchase price. Your investment is being recouped quicker.
Again, the cap rate is a mathematical expression used to compare two relatively similar income producing properties.
It has nothing to do with tenant type or geographical location. It is simply a mathematical expression, like expenses/sf. However, since it is generally expected that newer buildings will have higher rents than older buildings, and high quality tenants will pay more for nicer space then a fledgling business would pay Cap rates are expected to be lower in new construction properties, and high quality assets, like high rises in urban areas.
You can extrapolate that further and make generalizations about geographic areas, saying that a certain neighborhood is known for better quality buildings and therefore might have a lower cap rate overall than the neighborhood one zip code over.
Analyzing details about income and expenses, tenant quality, and demographics about the property neighborhood are more important than analyzing cap rate, in my opinion.
The cap rate is a valuable tool to compare two like income producing properties.