ly, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
You miss 100 percent of the shots you never take, and if you think it’s expensive to hire a professional to do the job, wait until you hire an amateur. FOR OVER 20 YEARS, I HAVE WORKED EXTENSIVELY WITH OWNERS AND BUYERS IN LAND, COMMERCIAL AND INVESTMENT REAL ESTATE IN PHOENIX, TUCSON AND THROUGHOUT ARIZONA. PLEASE LET ME KNOW HOW I CAN HELP YOU. Call me if you want to sell your property and need an estimated value. Phone / Prefer cell: 520-975-5207
Office: 480-948-5554 or email me walterunger@ccim.net. – What is a CCIM.
In Business and in Life you don’t get what you deserve, you get what you Negotiate.
contact me if you want the me to get you the value of your property.
CLICK HERE TO VIEW ALL MY LISTINGS.
Are you ready to sell or purchase your Land or Commercial Building in Phoenix, Scottsdale, Maricopa County and Pinal County, Arizona, please call me?
Walter Unger CCIM – cell: 520-975-5207 – walterunger@ccim.net
HOW TO CALCULATE THIS CRITICAL CRE INVESTMENT METRIC AND WHY IT MATTERS. IF YOU HAVE 2 MINUTES TO SPARE, WE COVER THE BASICS OF THE TERM IN THE FIRST OF OUR NEW EDUCATIONAL VIDEO SERIES, BUILDING BLOCKS.
TO LEARN MORE, KEEP READING THE ACCOMPANYING ARTICLE, WHICH DELVES DEEPER INTO CRE’S MOST UBIQUITOUS INVESTMENT METRIC.
Do you know what a cap rate is? If you have 2 minutes to spare, we cover the basics of the term.
SEE IT ALL: What Is a Cap Rate? | LoopNet.com
How To Calculate This Critical CRE Investment Metric and Why It Matters
If you’re contemplating your inaugural investment in commercial real estate, one term that you probably keep coming across is capitalization rate, or “cap rate.” This term may seem somewhat esoteric, but it’s arguably the most ubiquitous criterion for evaluating an income-producing real estate investment — it’s also an exceptionally simple formula to calculate.
But we’ll get to that. Let’s start with a basic definition first.
What Is a Cap Rate?
“A cap rate expresses an anticipated annual return on an investment,” according to Jonathan Squires, managing director at Cushman & Wakefield.
How Is a Cap Rate Calculated?
In order to calculate a cap rate, an investor needs to be in possession of two data points: the asset’s market value or asking price and the property’s net operating income (NOI). A property’s NOI is established by starting with its annual revenue and subtracting annual expenses related to operating and managing the asset before debt service.
To determine the cap rate, an investor will divide the property’s NOI by the listing price of the asset, as reflected in the graphic below.
NOI : PURCHASE PRICE = CAP RATE
So, for example, if an investor was considering purchasing an industrial property for $2 million, and the subject property had an NOI of $100,000, you would divide $100,000 by $2 million, which results in .05, or a cap rate of 5%, as detailed in the below graphic.
$100,000 : $2,000,000 = 0.05 = 5%
Why Do Investors Use Cap Rates?
According to Squires, cap rates became dominant in real estate over the past several decades as the sector was increasingly institutionalized.
What Is a Cap Rate? | LoopNet.com
“As real estate has become more of an institutional investment, we’ve seen the cap rate become the first question that anyone has when looking at a property,” Squires said.
That’s because a cap rate is simple to calculate and enables investors to easily compare properties across asset classes and geographies. More importantly, a cap rate will help an investor understand the perceived or potential risk of owning a property.
A property with a higher cap rate will potentially produce a higher return, but it could also be more risky; on the other hand, a property with a lower cap rate might produce less income but offer greater stability.
Do you know what a cap rate is?
Of course, Squires advises that the notion of “risk” in this instance is entirely theoretical. A cap rate is really a measurement of “the perceived risk” of owning a property, Squires noted; whereas “the actual risk is experienced while owning the property.”
How Reliable Is a Cap Rate?
While a cap rate can be a useful initial metric for a real estate investor, it’s certainly not the only calculation worth considering. That’s because there are numerous facets of owning a property that a cap rate doesn’t capture, including debt service and capital expenses.
Squires also advised that investors need to be wary of the cap rate that’s advertised by the seller of a property or by their agents. That’s because it’s generally difficult to determine what expenses are accounted for in the NOI that was used to calculate the cap rate that’s being presented.
As Squires acknowledged with a wry chuckle, “You could always estimate some cap rate; whether you believe it or not is another question.”
For instance, Squires said that many advertised cap rates will use low or no management fees, assuming the property will be “self-managed,” even if that’s an unlikely reality. They also may be using outdated tax figures.
Squires also noted that many listing brokers don’t properly account for “credit loss” or vacancy loss in their NOI calculations. Credit/vacancy loss refers to the period of time that a property is vacant after one tenant leaves and a replacement has yet to materialize, as well as the costs associated with securing that new tenant.
What Is a Cap Rate? | LoopNet.com
“Credit loss is a bit of an art,” Squires said, because it varies widely from asset to asset. For instance, a rent-stabilized multifamily property may have relatively little turnover and incur a credit loss averaging only 2% per year, whereas a retail or restaurant location may have more frequent vacancies, resulting in a credit loss closer to 10% per year on average.
Squires advised that even properties that are advertised as being leased on a triple-net (NNN) basis — which suggests that all of the property expenses are handled by the tenant, not the owner — can be somewhat misleading, as there are almost always some expenses that are carried by the property owner. “It’s quite rare for something to be an absolute NNN,” Squires said.
As for the expenses that should be included in a property’s NOI, Squires suggested that in addition to vacancy loss and management fees, real estate taxes (current and projected); water and sewer expenses; common area maintenance, cleaning and electric expenses; administrative and reporting costs; and insurance premiums are all elements that should probably be included.
However, the approach to calculating NOI, and therefore estimating a property’s cap rate, will vary widely based on the type of asset, structure of any leases currently in place, local market predilections and the specific investor’s approach to owning and operating the property.
“An investor really needs to do their due diligence in order to make sure that the income is what is advertised, as well as the expenses. A cap rate that is derived from either faulty income or faulty expenses or both is not going to be an accurate measure that you can count on,” Squires said.
Cap Rate Alternatives
For investors inclined to dig deeper, Squires noted that a cash-on-cash yield represents an appealing alternative to a cap rate. A cash-on-cash return generally layers debt costs and capital improvement expenses into the calculation, which should give an investor a clearer understanding of the return they can anticipate from their investment each year.
It’s also worth noting the difference between the “going-in” cap rate and the “residual” or “terminal” cap rate of a property. The going-in cap rate is calculated using the net operating income in the year prior to acquisition, divided by the purchase price.
However, most real estate investors hold on to their investments for a number of years. In order to calculate the overall return on their investment, investors will have to make an assumption on the terminal cap rate they will achieve in the exit year, which will project the property’s future sale price. This assumption is based on a number of macro-economic factors such as interest rate inflation, future market demand and rental rate growth. A terminal cap rate that is lower than the going-in rate often correlates to a profitable investment.
Perhaps the most basic technique for analyzing a real estate investment is looking at the price per square foot, which can be calculated by dividing the purchase price of the asset by the size, as measured in square feet, of the property.
Squires observed that looking at the price per square foot in coordination with the cap rate can foster an interesting perspective for a potential investor. “If a property has a low price per square foot, but also a low cap rate, it still could be attractive to an investor because they believe that the future value of the rents will be higher.”
According to Squires, most investors will look at all these metrics and more before purchasing a property. It’s important for investors to conduct their own analyses and not just rely on the information provided by the seller.
“Once you’ve learned how people are [presenting data], you can develop your own metrics so that you can do an independent analysis,” he said.
DANIEL SCHMERGELMANAGING EDITOR
Daniel Schmergel is the Managing Editor of LoopNet. He has worked in the commercial real estate industry for more than 15 years, serving in a variety of marketing, content and communications roles for companies that include Newmark Knight Frank and Cushman & Wakefield. He has also previously held positions as an adjunct professor, music critic and editor-in-chief of an online arts and culture publication.
SEE IT ALL: What Is a Cap Rate? | LoopNet.com
What Is a Cap Rate? | LoopNet.com
| What is a Commercial Real Estate Cap Rate? |
| A commercial real estate cap rate is a calculation that investors use to determine the potential return on their investment. This calculation takes into account the purchase price of the property, the annual net operating income, and the desired rate of return. By understanding what a cap rate is and how to calculate it, you can make more informed decisions about your investments. A cap rate is important because it provides a quick way to compare investment properties. For example, let’s say you’re considering two properties: Property A has a purchase price of $100,000 and an annual net operating income of $20,000. Property B has a purchase price of $200,000 and an annual net operating income of $40,000. To calculate the cap rate, you would divide the annual net operating income by the purchase price. For Property A, that would be $20,000/$100,000, or 0.20. For Property B, that would be $40,000/$200,000, or 0.20. As you can see, both properties have a cap rate of 0.20. One advantage of using a cap rate is that it’s relatively easy to calculate. However, there are some drawbacks. For example, the cap rate doesn’t take into account the mortgage or other expenses associated with the property. In addition, the cap rate can be misleading if you’re comparing properties in different markets. When you’re considering an investment property, it’s important to understand what a cap rate is and how to calculate it. By taking into account the purchase price, the annual net operating income, and the desired rate of return, you can make more informed decisions about your investments. Always seek the help of an investment advisor or real estate agent in your area to get a better understanding of what is a good cap rate for the market you are looking at. https://www.investopedia.com/terms/c/capitalizationrate.asp |
FROM ME: FOR OVER 20 YEARS, I HAVE WORKED EXTENSIVELY WITH OWNERS AND BUYERS IN LAND, COMMERCIAL AND INVESTMENT REAL ESTATE IN PHOENIX, TUCSON AND THROUGHOUT ARIZONA. Now is the time, if you are thinking of selling or purchasing your Land or Commercial Building in Phoenix, Scottsdale, Maricopa County, Pinal County, Arizona / Office / Retail / Industrial / Multi-family / please call me on my cell 520-975-5207 or e-mail me walterunger@ccim.net. Investors and Owner / Users need to really know the market today before making a move. The market has a lot of moving parts. What is going on socio-economically, what is going on demographically, what is going on with location, with competing businesses, with public policy in general — all of these things affect the quality of selling or purchasing your Commercial Properties, Commercial Investment Properties and Commercial and large tracts of Residential Land Therefore, you need a broker, a CCIM (Certified Commercial Investment Member) who is a recognized expert in the commercial and investment real estate industry and who understands your needs. I am marketing my listings on Costar, Loop-net, CCIM, CREXi, Catylist, and various other web sites. I also sold hundreds millions of dollars’ worth of Investment Properties / Owner User Properties in Retail, Office Industrial, Multi-family and Land in Arizona and therefore I am working with brokers, Investors and Developers. I am also a CCIM and through this origination ( www.ccim.com ) I have access to marketing not only in the United States, but also international
DISCOVER WHAT IS HAPPENING IN ARIZONA
History of Arizona from 900 BC – 2017 -Timeline.
What is a CCIM. In Business and in Life you don’t get what you deserve, you get what you Negotiate.
contact me if you want the me to get you the value of your property.
Walter Unger CCIM – cell: 520-975-5207 – walterunger@ccim.net
Click here to find out what is a CCIM:
CLICK HERE TO VIEW ALL MY LISTINGS.
Are you ready to sell or purchase your Land or Commercial Building in Phoenix, Scottsdale, Maricopa County and Pinal County, Arizona, please call me?
DISCOVER WHAT IS HAPPENING IN ARIZONA
History of Arizona from 900 BC – 2017 -Timeline.
Walter Unger CCIM cell: 520-975-5207 walterunger@ccim.net
Walter Unger CCIM
Associate Broker
West USA Commercial Division
7077 E MARILYN RD.
Suite 200, Building 4.
Scottsdale AZ, 85254
Phone: 480-948-5554
Cell: 520-975-5207
History of Arizona from 900 BC – 2017 -Timeline.
History of Arizona from 900 BC – 2017 -Timeline.
WHY PHOENIX? AMAZING!!! POPULATION IN 1950 – 350 K PEOPLE; “NOW 5 MIL”. – “5TH. BIGGEST CITY IN USA”
- DEMOGRAPHIC FACTS ABOUT MARICOPA COUNTY:
Walter Unger CCIM – walterunger@ccim.net – 1-520-975-5207 – http://walter-unger.com
Timeline of Phoenix, Arizona history
Facts of Arizona – year 1848 to 2013
CLICK HERE: Arizona Opportunity Zones As We Understand /maps. Interested!!! Please contact me.
Feel free to contact Walter regarding any of these stories, the current market, distressed commercial real estate opportunities and needs, your property or your Investment Needs for Comercial Properties in Phoenix, Tucson, Arizona.
Walter Unger CCIM
Associate Broker
West USA Commercial Division
7077 E MARILYN RD.
Suite 200, Building 4.
Scottsdale AZ, 85254
Phone: 480-948-5554
Cell: 520-975-5207
FOR OVER 20 YEARS, I HAVE WORKED EXTENSIVELY WITH OWNERS AND BUYERS IN LAND, COMMERCIAL AND INVESTMENT REAL ESTATE IN PHOENIX, TUCSON AND THROUGHOUT ARIZONA. PLEASE LET ME KNOW HOW I CAN HELP YOU PLEASE CALL ME
CLICK HERE TO VIEW ALL MY LISTINGS.
Also Call me if you need an estimated value of your Property.
Call me if you want to see a map with what is in the Construction Pipeline for Apartments.
Prefer cell: 520-975-5207, or email me walterunger@ccim.net. CLICK HERE TO VIEW ALL MY LISTINGS.
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Walter Unger CCIM, CCSS, CCLS
I am a successful Commercial / Investment Real Estate Broker in Arizona now for 20 years. If you have any questions about Commercial / Investment Properties in Phoenix or Commercial / Investment Properties in Arizona, I will gladly sit down with you and share my expertise and my professional opinion with you. I am also in this to make money therefore it will be a win-win situation for all of us.
Please reply by e-mail walterunger@ccim.net or call me on my cell 520-975-5207
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The information in this blog-newsletter is for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.