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what are cap rates

  • March 12 2010 - Del Rio
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Answers (3)

This a very good question, and it's answer should be the basic building block of any prudent long term hold strategy. The cap rate or cash throw off rate is the percentage of the home's value paid to the investor in net proceeds on an annual basis. It is found, quite simply by solving for the NOI and then dividing NOI by price. So a home selling for 100k which has $8000 NOI annually would have a cap rate of 8%. Not a bad return depending on the location. During the real estate boom cap rates were low in many areas and it made it difficult for buy and hold investors to find properties worthy of their attention (which only pushed price up further and cap rates down). Now, however, the market is topsy turvey and is allowing buy and hold investors to earn cap rates stating in the 9's in very high quality neighborhoods. Properties like these may have had a top cap rate of 4% during the boom. This was really a great question. When my investor clients ask a question like this I normally send them to this video on youtube.

http://www.youtube.com/watch?v=gPjjViYkoVg

Folks buying a home as a primary residence should as well consider the cap rate. Basing an offer price to purchase a property in accordance to an expected return would be very useful to homebuyers when they take into consideration the investment value of their purchase. I say to my homebuying clients all the time " depending upon the market (comparable) value of a home when deciding upon an offer price is less like investing and more like gambling. One must consider the cap rate if one considers the purchase of a home an investment."  Where an investor may need a return of 9% or more a homeowner may be content with an expected return "if the home was rented" of 5%. Since many view homeownership as forced savings a 5% return beats many other bank oriented or offered investment vehicles. The great part of this method is, since rents generally go up, so will you value, and this will happen under many conditions. It leaves the home  less vulnerable to the whims and machinations of the retail marketplace.

That's just my 2 cents, and it ain't worth much.
Much luck to ya......



  • May 16 2010
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The Capitalization Rate (also known as "Cap Rate") is used to compare an income property with other similar income properties.  It can also be used to place a value on a property based on the income it generates.

The Cap Rate merely represents the projected return for one year as if the property was bought with all cash.  Read more here:

http://www.noradarealestate.com/blog/estimating-value-with-the-capitalization-rate/

  • March 12 2010
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A Capitialization Rate or cap rate is a simple calculation to determine the value of an investment property based on its net income (after operating expenses). You can find further explanation here: http://realestate.about.com/od/knowthemath/ht/cap_rate_calc.htm
  • March 12 2010
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