Re: Expected Cap Rates?

[Liquid1010]

Hello Everyone,

I`m new to the forum and relatively new to Real Estate Investing, however I enjoy doing my research and making sure that I jump into things only when the data points me that direction. Anyhow, I was wondering what expectations are for CAP rates in the coming months through this downturn?

Most of my analysis is still showing rates in the range of 6-7%, but I`m continuing to wait, as currently I only own one investment property.

 

[Nir]

The reduction you expect in the property`s price is approximately the increase in CAP.

Example: 100K property with net operating income of 10K generates 10% CAP.

As a result of a 10% price reduction:

Property`s new price: 90K
net operating income is still 10K (assuming no change in rent which is pretty much the case)
New CAP = 10K/90K=11.1%

So what you`re really asking is what additional price reduction is expected. who knows? property prices are already low in some areas and in certain areas you can already find 10% CAP properties. For me that`s enough and no additional waiting period is required.

 

[Thomas Beyer]

QUOTE (investmart @ Nov 26 2008, 06:20 PM) The reduction you expect in the property`s price is approximately the increase in CAP.

Example: 100K property with net operating income of 10K generates 10% CAP.

As a result of a 10% price reduction:

Property`s new price: 90K
net operating income is still 10K (assuming no change in rent which is pretty much the case)
New CAP = 10K/90K=11.1%

So what you`re really asking is what additional price reduction is expected. who knows? property prices are already low in some areas and in certain areas you can already find 10% CAP properties. For me that`s enough and no additional waiting period is required.
10% CAP rate is indeed an excellent CAP rate to buy .. IF you can get a mortgage and have enough cash and IF the town is a decent one that is not going away.

In small towns, especially with older uglier properties it is VERY hard to get a mortgage over 50% LTV, unless a 4-plex or smaller (i.e. residential, not commercial).

10% CAP is often mis-leading as some expenses like management are not counted as they assume self-managed. Or they have low R&M, and also assume "do it yourself"

Also: is the rent or vacancy sustainable long term ?

So, ensure the viability of the property and town .. even if owned from afar .. if all checks out .. yes, a 10% CAP is a very good buy !

 

[Liquid1010]

Thank you for the information. I mentioned CAP because to a degree the NOI of a property is affected by the market which drives property prices in first places. When property prices drop, rental income often drops slightly as well. So I was looking at CAP as a way to review both.

One area I have very little understanding in is the difference between commercial and residential CAP rates. Are they historically significantly different?

 

[Thomas Beyer]

QUOTE (Liquid1010 @ Nov 26 2008, 07:29 PM) Thank you for the information. I mentioned CAP because to a degree the NOI of a property is affected by the market which drives property prices in first places. When property prices drop, rental income often drops slightly as well. So I was looking at CAP as a way to review both.

One area I have very little understanding in is the difference between commercial and residential CAP rates. Are they historically significantly different?
Commercial: should be higher than residential due to
a) higher risk and
b) higher vacancies, and
c) more expensive mortgage (no CMHC !!!)

CAP rates have not been higher the last 3-4 years due to high demand in commercial. Has now corrected such that office buildings or retail CAPs have risen / prices fallen sharply . and also because mortgage rates are MUCH MUCH higher now than even 6 months ago in commercial .. 400 to 500 bps (basis points, a 1/100 of 1%) over the bond rate for commercial mortgages .. so 7% to 8% !

CAP rates are also higher in smaller towns, usually !

Expect CAP rates across the board to go up somewhat due to lower LTVs (loan-to-values) i.e. more cash down required !