CAP Rates Help Real Estate Investors Determine Value

 

Investors look at Capitalization rate (or "CAP rate") of a property to help determine value.

CAP rate is ratio between the net operating income (NOI) produced by an asset and its capital cost (the original price paid to buy the asset) or alternatively its current market value. 

CAP rate  =  Annual Net Operating Income (NOI) of an asset (property) divided by COST (or current value of the asset)

The higher the NOI is in relationship to cost (or value) of the property, the higher the CAP rate would be.  When investors see higher CAP rates, they value proposition better.

CASH FLOW -  money the investor will have after collecting monthly income from property and paying all expenses (including property taxes, insurance, maintenance, mortgage, etc).  But CASH FLOW is different for each potential buyer and impacted by expenses, like property taxes, insurance, maintenance, and debt service payments.  Loan or debt service payments will directly relate to interest rates, amortization period, and down payment.  Different buyers will use different kinds of financing, and one is likely to have higher debt payments than the other and different CASH FLOW.  So CAP rates help investors more in determining value.

 

CAP RATES are a better measure of a property’s investment potential, regardless of what specific buyer and debt payments.  CAP RATE should be the same regardless of who is buying, and different investors can do an apples-to-apples comparison of the same property, is equal to return on investment (ROI) the investor receives if he pays all cash for a property, and is a good tool to help determine value.   

Investors always want to see properties with higher CAP rates to determine positive value.  It makes sense that some look at proposed CAP rates here at Orange County, CA ...  of about 5 percent ... and want to get improved value with lower prices.

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HARRISON K. LONG - REALTOR® and broker associate, GRI – Coldwell Banker Residential Brokerage - 949-854-7747 (phone) – ExploreProperties@gmail.com (email) - CA DRE 01410855 – SFR short sale and foreclosure resource certified by the National Association of REALTORs® – now serving as an appointed director at California Association of REALTORs® - also a lawyer licensed by the California State Bar, member #69137.

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