Often called a ‘cap rate’, it’s a lot less complicated than many are led to believe. Put in the simplest terms, if you buy a real estate investment property for cash, just divide the Net Operating Income (NOI) by the price you paid. The resulting percentage will be your capitalization rate.

NOTE: Don’t confuse cap rate if cash on cash return. That’s another post altogether.

The NOI is what’s left after all vacancies and operating costs. Do NOT count what’s known as ‘capital expenditures’ as operating costs. If you repair something, or spend money maintaining it, it’s an operating expense. If, however, you don’t repair the stove/oven in a unit, you replace it with a new one, that’s a capital expenditure. Capital expenditures are NOT operating expenses, and therefore CANNOT be taken in the year spent against that year’s income. They must be depreciated over time.

Anywho, back to NOI.

Gross Scheduled Income (GSI) — minus Vacancy and ‘credit’ losses — minus all Operating Expenses — = NOI.

If you have loan payments, you want NOI to be more than your annual payments (debt service). NOI minus debt service = Cash Flow (CF).

Soooooo . . . NOI/Price Paid = Capitalization Rate

If NOI is $10, and you paid $110 for the property — $10/$110 = 9.1% Cap Rate.

I’d love to talk with you. Gimme a call at 619 889-7100 if for no other reason than you’re a kind person, and I need a fix. Or, click on the Contact BawldGuy button up top and do your best Mark Twain impression. Have a good one.

Since as far back as 2006 or so, people have asked me, sometimes tried to cajole me into advising them or even representing them in the acquisition of investment real estate in Las Vegas. The next time I say yes to one of those requests will be the first. I wish I understood the magnetic pull that market had on so many people. It’s done nothing but lead the nation in foreclosures and lose property value. Besides those two factors, it’s been a highly rewarding market to investors.

I’ve literally had clients leave me cuz I wouldn’t help ‘em invest there. Twice I’ve had those same clients come back to me for help. I’m pretty good at what I do, but a magic wand has never been part of my arsenal. They lost everything they bought in Vegas.

Why do I bring this up now? [Read more...]

Ask anyone who’s dipped their toes in the real estate investment pool, and they’ll tell ya. There’re are rules of thumb for nearly everything. Many of ‘em are formulas. Can’t pay more than this much, based on that set formula. Even I haven’t seen ‘em all, but I’ll tell you from experience that they all work — ’til they don’t. When they don’t work, it’s usually what Dad used to call ‘an opportunity to learn’. My personal history with rules of thumb is mixed.

Serious people though, simply don’t rely on them for anything that matters more than the quality of their next cuppa coffee. Here’s my favorite example.

Buying income property based on (fill in number here) X gross scheduled rents. [Read more...]

Attention: Rant Alert

There are times when a buddy, a reader, or family member sends me a link, or tells me about some real estate investment they read about online. Most of the time it’s a thoughtful gesture. They wanna know my take, or if I’d heard about this or that new ‘trend’. Then there’s the other day. There are some things so stoopid, you know the person tellin’ ya can’t possibly be makin’ it up. ‘Course this time it was a link, not a conversation, so I got to read it for myself. The sender, a local real estate agent for whom I have enormous respect, wasn’t disappointed in my response. I was staggered by what I’d read.

My response

I told my buddy, by now snortin’ at how he’d so easily set the hook in my lip, that he should print the post. Then he should put it a shredder, preferably one that crosscuts. Then take the resulting confetti and spread it evenly over his front and back lawns, watering moderately daily for a week or two. By that time he’d have the greenest lawns in his neighborhood.

The Advice [Read more...]