Area cap rates?
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QUOTE (Gen1GT @ Feb 14 2010, 10:41 AM) How do I know what the going cap rate is for an area? Similarily, how do I know what discount rate to use when calculating discounted cash flows?
CAP rates: CMHC, realtors, experience
discounted cash flow: many wildly varying opinions .. from 2% to 28% depending on point of view / risk / venture !
What SPECIFIC question do you have .. many broad questions have meaningless, general answers !
CAP rates: CMHC, realtors, experience
discounted cash flow: many wildly varying opinions .. from 2% to 28% depending on point of view / risk / venture !
What SPECIFIC question do you have .. many broad questions have meaningless, general answers !
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And yet another reason why I can`t wait to read Thomas`s book
"What SPECIFIC question do you have .. many broad questions have meaningless, general answers !"
Thomas = Jerry Seinfeld`s half cousin?
QUOTE (ThomasBeyer @ Feb 14 2010, 01:20 PM) CAP rates: CMHC, realtors, experience
discounted cash flow: many wildly varying opinions .. from 2% to 28% depending on point of view / risk / venture !
What SPECIFIC question do you have .. many broad questions have meaningless, general answers !
"What SPECIFIC question do you have .. many broad questions have meaningless, general answers !"
Thomas = Jerry Seinfeld`s half cousin?
QUOTE (ThomasBeyer @ Feb 14 2010, 01:20 PM) CAP rates: CMHC, realtors, experience
discounted cash flow: many wildly varying opinions .. from 2% to 28% depending on point of view / risk / venture !
What SPECIFIC question do you have .. many broad questions have meaningless, general answers !
QUOTE (housingrental @ Feb 14 2010, 01:40 PM) And yet another reason why I can`t wait to read Thomas`s book
"What SPECIFIC question do you have .. many broad questions have meaningless, general answers !"
Thomas = Jerry Seinfeld`s half cousin?
If you google cap rates you `ll come up with a few hits like this one:
http://www.google.ca/url?sa=t&source=w...Zt-WwhxwGyU4JiA
"What SPECIFIC question do you have .. many broad questions have meaningless, general answers !"
Thomas = Jerry Seinfeld`s half cousin?
If you google cap rates you `ll come up with a few hits like this one:
http://www.google.ca/url?sa=t&source=w...Zt-WwhxwGyU4JiA
I thought my questions were pretty specific; I didn`t ask how many things in the world are coloured blue. But whatever...
What is the cap rate for the area around Centre Mall in Hamilton, Ontario, Canada? Specifically between Barton, Kenilworth, Ottawa and Cannon Streets.
Thomas, what discount rates would you use for said area of Hamilton?
Are those specific enough? LOL
What is the cap rate for the area around Centre Mall in Hamilton, Ontario, Canada? Specifically between Barton, Kenilworth, Ottawa and Cannon Streets.
Thomas, what discount rates would you use for said area of Hamilton?
Are those specific enough? LOL
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QUOTE (Gen1GT @ Feb 15 2010, 05:56 AM) I thought my questions were pretty specific; I didn`t ask how many things in the world are coloured blue. But whatever...
What is the cap rate for the area around Centre Mall in Hamilton, Ontario, Canada? Specifically between Barton, Kenilworth, Ottawa and Cannon Streets.
Thomas, what discount rates would you use for said area of Hamilton?
Are those specific enough? LOL
The question re area was not stated anywhere in this post until now ..
CAP rate in Hamilton: 8% or so .. plus or minus 1.5% if area is bad or great !
Enlighten me on discount rate .. for what purpose ? This usually used to calculate a present value from a future value !
What future value ?
What is the cap rate for the area around Centre Mall in Hamilton, Ontario, Canada? Specifically between Barton, Kenilworth, Ottawa and Cannon Streets.
Thomas, what discount rates would you use for said area of Hamilton?
Are those specific enough? LOL
The question re area was not stated anywhere in this post until now ..
CAP rate in Hamilton: 8% or so .. plus or minus 1.5% if area is bad or great !
Enlighten me on discount rate .. for what purpose ? This usually used to calculate a present value from a future value !
What future value ?
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QUOTE (Gen1GT @ Feb 15 2010, 06:14 PM) Yes, I would like to calculate net present value. If I can calculate future value based on estimated price of the future sale and the yearly discount rate, then I can see if net present value is a positive number.
future value of what ?
you buy an asset TODAY at today`s prices !
discounted values are used for start-up firms with projected future cash-flows .. not usually in real estate !
future value of what ?
you buy an asset TODAY at today`s prices !
discounted values are used for start-up firms with projected future cash-flows .. not usually in real estate !
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QUOTE (Gen1GT @ Feb 15 2010, 05:14 PM) Yes, I would like to calculate net present value. If I can calculate future value based on estimated price of the future sale and the yearly discount rate, then I can see if net present value is a positive number.
I think you have to be careful with not mixing up methods of economic valuations.
Corporate projects such as drilling an oil well or building an autoplant are often evaluated in terms of cash flow stream during the life of the project, including final sale or decommissioning costs. For these types of evaluation, the `time value` of the project`s cash flow is calculated using a discount rate to calculate back the `net present value` of the cash flow. Another somewhat related measure is the IRR or internal rate of return.
When evaluating real estate, often simpler measurements of profitability are used such as Return on Investment (ROI) or net operating income calculated on an annual basis (NOI) . It is the latter NOI divided by the initial acquisition price that represents the capitalization rate for the property also known as cap rate.
Hope this helps.
I think you have to be careful with not mixing up methods of economic valuations.
Corporate projects such as drilling an oil well or building an autoplant are often evaluated in terms of cash flow stream during the life of the project, including final sale or decommissioning costs. For these types of evaluation, the `time value` of the project`s cash flow is calculated using a discount rate to calculate back the `net present value` of the cash flow. Another somewhat related measure is the IRR or internal rate of return.
When evaluating real estate, often simpler measurements of profitability are used such as Return on Investment (ROI) or net operating income calculated on an annual basis (NOI) . It is the latter NOI divided by the initial acquisition price that represents the capitalization rate for the property also known as cap rate.
Hope this helps.
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QUOTE (gwasser @ Feb 15 2010, 07:31 PM) It is the latter NOI divided by the initial acquisition price that represents the capitalization rate for the property also known as cap rate.
Correction: estimated CAP = NOI divided by the current asking price, not the "initial acquisition price".
This is the formula most commonly used by sellers to calculate the CAP they show on listings.
Unfortunately, more often than not, both the sellers and realtors lie by "forgetting" to add vacancy, repair and maintenance and management to the expense when calculating NOI and CAP.
I`m not generalizing of course, I have friends who are realtors, but sadly most feel they have to be liars to survive.
The above is the most common CAP calculated. However, even if you want to estimate your current CAP and you are not selling, NOI should not be divided by "initial acquisition price" but rather by property`s current estimated value.
Also, to estimate CAP more accurately as a buyer you can use the property price you believe you can negotiate instead of asking price.
Regards,
Neil
Correction: estimated CAP = NOI divided by the current asking price, not the "initial acquisition price".
This is the formula most commonly used by sellers to calculate the CAP they show on listings.
Unfortunately, more often than not, both the sellers and realtors lie by "forgetting" to add vacancy, repair and maintenance and management to the expense when calculating NOI and CAP.
I`m not generalizing of course, I have friends who are realtors, but sadly most feel they have to be liars to survive.
The above is the most common CAP calculated. However, even if you want to estimate your current CAP and you are not selling, NOI should not be divided by "initial acquisition price" but rather by property`s current estimated value.
Also, to estimate CAP more accurately as a buyer you can use the property price you believe you can negotiate instead of asking price.
Regards,
Neil
QUOTE (investmart @ Feb 16 2010, 12:53 AM) between Barton, Kenilworth, Ottawa and Cannon Streets!?? `gen1GT`, NY Harlem`s CAP is even higher!
That`s why you live in Toronto, not Hamilton, and is why I`m concerned with future values. The area in question is about to see a revitalization. The nearby Centre Mall was just torn down and replaced with Big Box style shopping. Look at the size of the mall on a map. Also, the entire length of Ottawa and Kenilworth streets contain storefront businesses. Owners of small shops have even been immigrating from the popular (yet high rent) Locke street BIA to Ottawa street. Homes can be purchased in the $50,000 to $150,000 range at current market, and I know I`m not the only investor already in the area.
Besides, I heard Harlem is much nicer than it was 20 years ago...
That`s why you live in Toronto, not Hamilton, and is why I`m concerned with future values. The area in question is about to see a revitalization. The nearby Centre Mall was just torn down and replaced with Big Box style shopping. Look at the size of the mall on a map. Also, the entire length of Ottawa and Kenilworth streets contain storefront businesses. Owners of small shops have even been immigrating from the popular (yet high rent) Locke street BIA to Ottawa street. Homes can be purchased in the $50,000 to $150,000 range at current market, and I know I`m not the only investor already in the area.
Besides, I heard Harlem is much nicer than it was 20 years ago...
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QUOTE (investmart @ Feb 15 2010, 10:36 PM) Correction: estimated CAP = NOI divided by the current asking price, not the "initial acquisition price".
This is the formula most commonly used by sellers to calculate the CAP they show on listings.
Unfortunately, more often than not, both the sellers and realtors lie by "forgetting" to add vacancy, repair and maintenance and management to the expense when calculating NOI and CAP.
I`m not generalizing of course, I have friends who are realtors, but sadly most feel they have to be liars to survive.
The above is the most common CAP calculated. However, even if you want to estimate your current CAP and you are not selling, NOI should not be divided by "initial acquisition price" but rather by property`s current estimated value.
Also, to estimate CAP more accurately as a buyer you can use the property price you believe you can negotiate instead of asking price.
Regards,
Neil
Sorry Neil to hear you feel most realtors are liars, but I think you misunderstand.
First of all, you can use a cap rate inconjunction with the asking price, however that would be pretty useless. Who cares about the asking price, what counts is what you pay for the place.
Secondly, in commercial real estate and I guess, you could to some degree ad to that single unit investment properties, as Don is in fact doing, a realtor often does not use the numbers supplied by the seller because they may be `adjusted` to favor the sale or the numbers are affected by conditions specific to the seller . Instead, the realtor creates the `realtor adjusted APOD` or realtor adjusted Annual Propertie Operating Data. The realtor in that case is to check the `market` rent and typical operating costs and some do indeed also check typical vacancy rates. The realtor uses these `typical` numbers to replace those supplied by the seller. Often, realtors do not include in the `realtor adjusted APOD` the vacancy rate, because they feel it is highly dependant on the landlord and does not necessarily demonstrate the potential of the property.
Now, some realtors maybe more optimistic than others, but that would not be necessarily be lying. Also, there is quite a difference in realtor experience when dealing with rental or investment properties and that may also result in different numbers. You as a sophisticated buyer should always either use your own numbers or at least check the numbers supplied to see if you agree. We call that due dilligence or caveat emptor.
Hope this clarifies the issue
This is the formula most commonly used by sellers to calculate the CAP they show on listings.
Unfortunately, more often than not, both the sellers and realtors lie by "forgetting" to add vacancy, repair and maintenance and management to the expense when calculating NOI and CAP.
I`m not generalizing of course, I have friends who are realtors, but sadly most feel they have to be liars to survive.
The above is the most common CAP calculated. However, even if you want to estimate your current CAP and you are not selling, NOI should not be divided by "initial acquisition price" but rather by property`s current estimated value.
Also, to estimate CAP more accurately as a buyer you can use the property price you believe you can negotiate instead of asking price.
Regards,
Neil
Sorry Neil to hear you feel most realtors are liars, but I think you misunderstand.
First of all, you can use a cap rate inconjunction with the asking price, however that would be pretty useless. Who cares about the asking price, what counts is what you pay for the place.
Secondly, in commercial real estate and I guess, you could to some degree ad to that single unit investment properties, as Don is in fact doing, a realtor often does not use the numbers supplied by the seller because they may be `adjusted` to favor the sale or the numbers are affected by conditions specific to the seller . Instead, the realtor creates the `realtor adjusted APOD` or realtor adjusted Annual Propertie Operating Data. The realtor in that case is to check the `market` rent and typical operating costs and some do indeed also check typical vacancy rates. The realtor uses these `typical` numbers to replace those supplied by the seller. Often, realtors do not include in the `realtor adjusted APOD` the vacancy rate, because they feel it is highly dependant on the landlord and does not necessarily demonstrate the potential of the property.
Now, some realtors maybe more optimistic than others, but that would not be necessarily be lying. Also, there is quite a difference in realtor experience when dealing with rental or investment properties and that may also result in different numbers. You as a sophisticated buyer should always either use your own numbers or at least check the numbers supplied to see if you agree. We call that due dilligence or caveat emptor.
Hope this clarifies the issue
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QUOTE (Gen1GT @ Feb 16 2010, 06:33 AM) That`s why you live in Toronto, not Hamilton, and is why I`m concerned with future values. The area in question is about to see a revitalization. The nearby Centre Mall was just torn down and replaced with Big Box style shopping. Look at the size of the mall on a map. Also, the entire length of Ottawa and Kenilworth streets contain storefront businesses. Owners of small shops have even been immigrating from the popular (yet high rent) Locke street BIA to Ottawa street. Homes can be purchased in the $50,000 to $150,000 range at current market, and I know I`m not the only investor already in the area.
Besides, I heard Harlem is much nicer than it was 20 years ago...
you actually raised valid points! I consderied the area myself! however most realtors will just not recommend buying there.
Besides, I heard Harlem is much nicer than it was 20 years ago...
you actually raised valid points! I consderied the area myself! however most realtors will just not recommend buying there.
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QUOTE (gwasser @ Feb 16 2010, 07:49 AM) Sorry Neil to hear you feel most realtors are liars, but I think you misunderstand.
First of all, you can use a cap rate inconjunction with the asking price, however that would be pretty useless. Who cares about the asking price, what counts is what you pay for the place.
Secondly, in commercial real estate and I guess, you could to some degree ad to that single unit investment properties, as Don is in fact doing, a realtor often does not use the numbers supplied by the seller because they may be `adjusted` to favor the sale or the numbers are affected by conditions specific to the seller . Instead, the realtor creates the `realtor adjusted APOD` or realtor adjusted Annual Propertie Operating Data. The realtor in that case is to check the `market` rent and typical operating costs and some do indeed also check typical vacancy rates. The realtor uses these `typical` numbers to replace those supplied by the seller. Often, realtors do not include in the `realtor adjusted APOD` the vacancy rate, because they feel it is highly dependant on the landlord and does not necessarily demonstrate the potential of the property.
Now, some realtors maybe more optimistic than others, but that would not be necessarily be lying. Also, there is quite a difference in realtor experience when dealing with rental or investment properties and that may also result in different numbers. You as a sophisticated buyer should always either use your own numbers or at least check the numbers supplied to see if you agree. We call that due dilligence or caveat emptor.
Hope this clarifies the issue
Hi Godfried, hope you did not take it personally. obviously you did not lie about the formula or something and I didn`t say that. you just made a mistake.
Regards, Neil
First of all, you can use a cap rate inconjunction with the asking price, however that would be pretty useless. Who cares about the asking price, what counts is what you pay for the place.
Secondly, in commercial real estate and I guess, you could to some degree ad to that single unit investment properties, as Don is in fact doing, a realtor often does not use the numbers supplied by the seller because they may be `adjusted` to favor the sale or the numbers are affected by conditions specific to the seller . Instead, the realtor creates the `realtor adjusted APOD` or realtor adjusted Annual Propertie Operating Data. The realtor in that case is to check the `market` rent and typical operating costs and some do indeed also check typical vacancy rates. The realtor uses these `typical` numbers to replace those supplied by the seller. Often, realtors do not include in the `realtor adjusted APOD` the vacancy rate, because they feel it is highly dependant on the landlord and does not necessarily demonstrate the potential of the property.
Now, some realtors maybe more optimistic than others, but that would not be necessarily be lying. Also, there is quite a difference in realtor experience when dealing with rental or investment properties and that may also result in different numbers. You as a sophisticated buyer should always either use your own numbers or at least check the numbers supplied to see if you agree. We call that due dilligence or caveat emptor.
Hope this clarifies the issue
Hi Godfried, hope you did not take it personally. obviously you did not lie about the formula or something and I didn`t say that. you just made a mistake.
Regards, Neil
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QUOTE (investmart @ Feb 16 2010, 10:16 AM) Hi Godfried, hope you did not take it personally. obviously you did not lie about the formula or something and I didn`t say that. you just made a mistake.
Regards, Neil
Don`t worry (too much
), I don`t take things personally that quickly.
Regards, Neil
Don`t worry (too much
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QUOTE (ThomasBeyer @ Feb 15 2010, 10:53 AM) The question re area was not stated anywhere in this post until now ..
CAP rate in Hamilton: 8% or so .. plus or minus 1.5% if area is bad or great !
Enlighten me on discount rate .. for what purpose ? This usually used to calculate a present value from a future value !
What future value ?
Is there a published source anywhere, where one can go to get the average/expected cap rates by investors for a City, Region or Province? Also you mentioned plus/minus for an area depending on how bad or good it is, what factors do you normally consider when deterimining how much of a cap rate premium you should add? Are you looking at vacancy rates, quality of tenants, crime rate etc, how does one assign a % value to these factors, just trying to figure out if theres a methodology for this.. thanks
CAP rate in Hamilton: 8% or so .. plus or minus 1.5% if area is bad or great !
Enlighten me on discount rate .. for what purpose ? This usually used to calculate a present value from a future value !
What future value ?
Is there a published source anywhere, where one can go to get the average/expected cap rates by investors for a City, Region or Province? Also you mentioned plus/minus for an area depending on how bad or good it is, what factors do you normally consider when deterimining how much of a cap rate premium you should add? Are you looking at vacancy rates, quality of tenants, crime rate etc, how does one assign a % value to these factors, just trying to figure out if theres a methodology for this.. thanks
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QUOTE (torontowest @ Feb 17 2010, 10:18 AM)
Is there a published source anywhere, where one can go to get the average/expected cap rates by investors for a City, Region or Province?
no
QUOTE (torontowest @ Feb 17 2010, 10:18 AM)
Also you mentioned plus/minus for an area depending on how bad or good it is, what factors do you normally consider when deterimining how much of a cap rate premium you should add? Are you looking at vacancy rates, quality of tenants, crime rate etc, how does one assign a % value to these factors, just trying to figure out if theres a methodology for this.. thanks
yes
Related reads:
Items to consider when buying an apartment building: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-14548-Buy_vs_Build.html
Multi-Family Primer in May 2009 Issue of Canadian RE Magazine:
http://myreinspace.com/rein_members_only1/Members-Only_Discussion/81-10996-Multi-Family_Primer_-_May_2009_Issue.html
Is there a published source anywhere, where one can go to get the average/expected cap rates by investors for a City, Region or Province?
no
QUOTE (torontowest @ Feb 17 2010, 10:18 AM)
Also you mentioned plus/minus for an area depending on how bad or good it is, what factors do you normally consider when deterimining how much of a cap rate premium you should add? Are you looking at vacancy rates, quality of tenants, crime rate etc, how does one assign a % value to these factors, just trying to figure out if theres a methodology for this.. thanks
yes
Related reads:
Items to consider when buying an apartment building: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-14548-Buy_vs_Build.html
Multi-Family Primer in May 2009 Issue of Canadian RE Magazine:
http://myreinspace.com/rein_members_only1/Members-Only_Discussion/81-10996-Multi-Family_Primer_-_May_2009_Issue.html
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QUOTE (ThomasBeyer @ Feb 17 2010, 10:58 AM)
no
yes
Related reads:
Items to consider when buying an apartment building: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-14548-Buy_vs_Build.html
Multi-Family Primer in May 2009 Issue of Canadian RE Magazine:
http://myreinspace.com/rein_members_only1/Members-Only_Discussion/81-10996-Multi-Family_Primer_-_May_2009_Issue.html
I've looked at the above post previously, and I'm in agreement about having to look at all those factors.
My particular question here is how can you arrive at an accurate cap rate to use for a given city or nighbourhood or geographic area. From the sounds of it, there doesnt seem to be a standard way to determine that... I've heard peoplee saying, "...the cap rate in this area/city is x%..." but how do they arrive at that rate?
Are they just performing an eyeball caluclation based on the current average sale prices in a given area and the typical/average net operating incomes in that area based on the average rents in the area??
no
yes
Related reads:
Items to consider when buying an apartment building: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-14548-Buy_vs_Build.html
Multi-Family Primer in May 2009 Issue of Canadian RE Magazine:
http://myreinspace.com/rein_members_only1/Members-Only_Discussion/81-10996-Multi-Family_Primer_-_May_2009_Issue.html
I've looked at the above post previously, and I'm in agreement about having to look at all those factors.
My particular question here is how can you arrive at an accurate cap rate to use for a given city or nighbourhood or geographic area. From the sounds of it, there doesnt seem to be a standard way to determine that... I've heard peoplee saying, "...the cap rate in this area/city is x%..." but how do they arrive at that rate?
Are they just performing an eyeball caluclation based on the current average sale prices in a given area and the typical/average net operating incomes in that area based on the average rents in the area??
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QUOTE (torontowest @ Feb 17 2010, 10:23 AM) Are they just performing an eyeball caluclation based ...
yes that is an accurate description .. as a CAP rate is NOT a precise metric as expenses and vacancies are always ESTIMATES.
For example, vacancies, which has up to 7 definitions:
a) vacant, and rent ready, but not yet rented
b) vacant, but rented for next month (but currently vacant)
c) occupied, but known to be vacant for next month
d) unoccupied, needs work to be rent ready
e) occupied, but rent not yet collected, and unlikely to be ever collected, heading for eviction
f) occupied, but rent partially paid only
g) occupied, but rent not yet collected, and likely to be paid in a few days (based on renter`s history)
So, with a 20 suiter and one unit in each of the 7 categories: what is the vacancy ?
It gets worse with expenses as it is hard tp use a precise figure to include in NOI calculations as many are necessary expenditures to IMPROVE the property and increase rents that are usually not counted in NOI (new elevator once in 20 years ? new roof once per 25 years ? new hallway carpets every 10 years ? new fridge every 16 years .. etc etc. etc ..)
A hard figure is price or price/unit (price per "door").
yes that is an accurate description .. as a CAP rate is NOT a precise metric as expenses and vacancies are always ESTIMATES.
For example, vacancies, which has up to 7 definitions:
a) vacant, and rent ready, but not yet rented
b) vacant, but rented for next month (but currently vacant)
c) occupied, but known to be vacant for next month
d) unoccupied, needs work to be rent ready
e) occupied, but rent not yet collected, and unlikely to be ever collected, heading for eviction
f) occupied, but rent partially paid only
g) occupied, but rent not yet collected, and likely to be paid in a few days (based on renter`s history)
So, with a 20 suiter and one unit in each of the 7 categories: what is the vacancy ?
It gets worse with expenses as it is hard tp use a precise figure to include in NOI calculations as many are necessary expenditures to IMPROVE the property and increase rents that are usually not counted in NOI (new elevator once in 20 years ? new roof once per 25 years ? new hallway carpets every 10 years ? new fridge every 16 years .. etc etc. etc ..)
A hard figure is price or price/unit (price per "door").