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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: The Duke of URL© who wrote (6443)	10/30/2002 11:55:47 AM
From: Elroy Jetson	Read Replies (1) \| Respond to of 306849

I am not familiar with your definition of Cap Rate. I don't believe it is widely used. The Cap Rate I am familiar with is Net Operating Income divided by Purchase Price. This is the same as an initial rate of return, not a projected future rate of return. invest-2win.com allstats.com investorwords.com jurock.mybc.com ccim.com This last link from the CCIM (Certified Commercial Investment Member) shows large multi-family being sold (2nd Quarter 2002) at an 8.5% Cap Rate, 8% now. The easy way to get these returns is buying a REIT. An 8.25% Cap Rate on a small property is suspect as these have been bid up to a level where Cap Rates are typically 2% or less (a bad value). An 8.25% Cap Rate on a smaller property is probably an older property with significant management problems.

To: The Duke of URL© who wrote (6443)	10/30/2002 2:21:56 PM
From: Elroy Jetson	Respond to of 306849

Several have asked how a Cap Rate differs from a Rate of Return. Commercial property Rate of Return use a lease-by-lease analysis. You project future rents, including vacancies and costs, typically for ten years - applying a Cap Rate to the tenth year Net Operating Income to estimate rents beyond year ten, in some views essentially simulating a sale in year eleven. (Even large changes in rent more than 10 years out make little difference to the current value or return.) There is specialized software for this, Pro-ject, Argus, etc. This sequence of estimated Net Operating Income is either: discounted by an investment rate to determine Net Present Value; compared to the proposed purchase price to determine the Internal Rate of Return, or Modified Internal Rate of Return. Working with institutional buyers/sellers you normally exchange a data file with the property rent details. Each participant can use this data to run a projection with their own set of assumptions for rent growth, inflation, etc. * * * * * * * * * * * * * * * * Cap Rate is a quick and often inaccurate approach to the same problem. It compares current year Net Operating Income with the proposed purchase price. Problems with this approach: overlooks increases or decreases in rents; a building with large tenants who will not renew their leases leaving a large gap in rent or renewals at lower than current rents; a building requiring maintenance levels not reflected in the current year's NOI.