All Forum Posts by: Immanuel Sibero

@Federico Cantero

With respect to your statement below:

....Well the value of the property changes a lot if its financed or not. The price does not change for the SELLER, but it does for the buyer.

I think you might be mixing up the concept of value (i.e. price) of a property and cost of capital  borne by the buyer. They are two different things. For example, if we were competing for the same property and my credit score was worse than yours, it's possible that my cost of capital would be higher than yours (i.e. I would have to pay more interest to secure the loan), but this would not change the value/price of the property to me or you or the seller. This simply means my cost of capital would be higher than yours.

Have you read the blog or the article referred to above? Here's a quote from the author:

....Since NOI does not consider debt payments, Cap Rate ignores the impact of financing. Cap Rate stays the same whether a property is leveraged or all paid off...

So financing has no impact on Cap Rate (i.e. value). This is one of the points of the article.

Cheers... Immanuel

Cap rate is generally a measure of risk and how much properties are in demand in a certain market. The more desirable the properties are in a certain market the lower the cap rate for that market. Your investment strategy determines whether you invest in low cap rate areas or higher cap rate areas. To say that there is a certain cap rate % where a property becomes a no-brainer does not make any sense. Many investors use IRR to evaluate a property, for example, by setting a minimum of 20% IRR. There are properties with 15% "cap" as well as properties with 4% "cap" all giving you >20% IRR. Which one is a no-brainer?

Cheers... Immanuel

@Seth Borman

I read your post and interpreted "yield rises..." as the building's NOI had actually increased (which, as you have clarified, is not the case). To me it would have made more sense when interest rates rise cap rates would rise which would result in lower valuations. Cap rates are more a valuation metric than a performance/yield metric. I get confused when they are used interchangeably.

Cheers.

 @seth borman

Your statement above: "When interest rates rise the yield rises and building values fall." Would the value of a building really fall when it makes more money? Wouldn't the value of the building rise instead?

Cheers... Immanuel

@Logan Hassinger

Well said.

It's tough when you google "cap rate", investopedia comes up relatively at the top. BP has this "twitter effect" where an investor would quote this definition and all the newbies would in turn "retweet" this definition to others. I'm a newbie myself, so I know how this goes.

I think Wikipedia.com has better description of cap rate. It shows that the concept of cap rate is much more than just the formula NOI/Value and makes no mention of cap rate as a measure of return. I posted earlier in this thread that you could equate cap rate to P/E ratio on a stock investment. P/E ratio is not commonly used as a measure of return. Cap rate is definitely not intended to be a measure of return, but you could certainly take the simple formula and read it backwards and sideways and make it to measure return...

Cheers... Immanuel

@Joe Splitrock

Now that's a great suggestion - "additional revenue stream.." which is essentially dollar for dollar increase in NOI.

@Julie Silvestro

Using Joe's suggestion above, you could actually incorporate "Cap Rate" in your marketing material, or at least in your conversation with the apartment owners. Assuming a 100-unit apartment and a market cap rate of 8%, a $20 per door per month additional revenue stream means you have just increased the value of the apartment by ... <gulp> ... a whopping $300,000. Yeah you're talking their language for sure!

Immanuel

@Michael Le

Fair enough.

I think it boils down to our interpretation of the definition. To me a Capitalization Rate is a rate that capitalizes something (yeah took me forever to come up with that one... lol) ... presumably into something else (kinda like a conversion rate). In this case, it is a rate that takes each dollar of NOI and converts it (i.e. capitalizes it) to n dollar of VALUE. It's like saying - give me your NOI and I'll measure your VALUE. Based on this notion, this rate actually measures value.

Now, mechanically you can always reverse the process whereby that same rate converts each dollar of VALUE into n dollar of NOI. It's like saying - give me your VALUE and I'll measure your NOI. In this case, yes I would agree that the rate effectively measures NOI (i.e. return). But I wouldn't call this rate "Cap Rate" because it doesn't capitalize anything.

Another perspective I'm offering is if you could accept that Cap Rate is conceptually equivalent to Price Earnings ratio (P/E ratio) of a stock then it's easy to see that Cap Rate is not (or should not be) a measure of return because P/E ratio is never used as a measure of return of a stock investment. EPS (earnings per share) has that covered. As a matter of fact, P/E ratio is a measure of how expensive a stock is much the same way cap rates are a measure of how expensive a property is. 

Immanuel

@David Jenkins

Yes,  .1 is 10%.  .1 is also .10.    So   .1 and .10 and 10% are all the same.

If you really didn't know that .1 and .10 and 10% are all the same and you didn't know what cap rate is but you had been able to successfully invest in small apartments then I'd say screw cap rate, just continue what you had been doing. I understand you want to expand to bigger apartments (i.e. 20+ units), if you can handle 5 unit apt then you should be able to handle 20 unit. Again, forget cap rate, just multiply everything by 4.

Or can you not do multiplication either?

Cheers... Immanuel

@Julie Silvestro

Interesting to see the different takes that people have on this thread. My take is:

- You're trying to market your service to apartment owners as an "investment".

- It's a potentially high yielding investment so you want to effectively communicate this to apartment owners using their "lingo".

- You found out that apt owners, in their lingo, frequently use "cap rate" as a measure of return on an "investment" whereby the higher the cap rate the higher the return.

- So you're thinking - in my marketing, why don't I use the term "cap rate" to describe the potential high return of the service that I'm offering. Surely this will convey my message better than the term "ROI", after all just about every real estate investor knows what cap rate is.

- So your question is: which is better -

• Buy my service, it's an "investment" with 60% ROI... OR
• Buy my service, it's an "investment" with 60% Cap Rate.

If I have described your original question correctly, then my recommendation is scrap the cap... :-)

Reasons:

- As it is, there are already many investments marketed using "cap rate" where cap rate is totally irrelevant - single family residence, turnkey SFR's, duplex, triplex, etc. To market internet service with cap rate is kinda out there...lol

- Cap rate is not even a measure of return.

- You shouldn't think that you can actually connect better with real estate investors (i.e. apartment owners, in this case) by discussing cap rate. It's the most misunderstood metric, in my opinion.

Cheers... Immanuel

@David Jenkins @James Wheelock

@James Wheelock

David,

As James pointed out, the formula for cap rate is NOI divided by property value(price). But your description was backwards -

$1M list price divided by $100K difference after expenses = 10% cap? 

It should be -

$100k difference after expenses divided by $1M list price = 10% cap.

Cheers... Immanuel