Since investors have been a dominant force in the real estate market lately, it’s important to pay more attention to capitalization rates. In fact, Foreclosure Radar‘s Sean O’Toole was just talking about this at last month’s main meeting at the Sacramento Association of Realtors. I thought it was very timely and relevant for him to encourage a room full of Realtors (and others) to think of properties in light of their investment potential to the point where they can be marketed with something like, “This property has a 7-8% cap rate”.
What is a cap rate and why does it matter? A capitalization rate is basically a tool for an investor to know how long it is going to take for the investment to pay for itself. Read this brief Wikipedia article for more details. Many investors are looking for properties with a certain cap rate as opposed to a very precise purchase price. This is why certain groups will sometimes pay more for a property than any of the comps might suggest because the cap rate still works for them (well, they’re also loaded too). Ultimately, thinking like these buyers will only help agents and appraisers be an asset in the market – not to mention it makes you sound smart.
How do you develop a capitalization rate? Many of us
already know this had this memorized at some point, but when it wasn’t used after the test, it got lost in the haystack. Here’s a quick refresher:
Three “how to” examples: Now let’s look at three examples to see if these properties would be a good fit for an investor who is looking for a 7% cap rate.
I hope this was a helpful reminder or even a catalyst to think out of the box as a new year of business approaches.
Questions: How do you use cap rates in your business? What other factors besides the cap rate go into whether to invest in a property or not?
If you have any questions or Sacramento home appraisal or property tax appeal needs, let’s connect by phone 916-595-3735, email, Twitter, subscribe to posts by email (or RSS) or “like” my page on Facebook