I am new in commercial field and am looking to invest myself in income properties. Cap rate is it the main fac

In Buying Property - Asked by Esther F. - Apr 27, 2009
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Answer(s)

sudersan j.
Broker/Agent
Houston, TX

It all depends on your investment criteria. Long term/ short term and the quality of the tenant. If you only look for higher CAP rate then be ready for some risk/ effort. Hope this answers your question.

Apr 27, 2009
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Scott R.
Broker/Agent
Manhattan Beach, CA

CAP rates are great indicators but remember that they are calculated derivitaves which makes them subject to error. Depending on the property type, cost per foot and gross income are great numbers because they are primary data and are not subject to manipulation. If you have further question you make visit me online or email me.
Best regards,
Scott

Apr 27, 2009
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Paul S.
Broker/Agent
Glendora, CA

Keep in mind a low cap rate means a high price. Cap is the relationship of the cash flow to the price. If the cash flow is low, relative to the price, the cap is low. As a result if you start at a 4.5% cap, the rents stay the same and the value goes up, the cap will go down. If you buy at 4.5% cap it means you may have to wait a very long time for the property to be worth more unless you can raise the rent. California real estate has for a long time had low caps (high price, low income). People invested in such properties because there was a (false) notion that California property would always go up. Investors were therefore betting on future value rather than income flow. I have property listed that carry an 8 cap with tenant paying all expenses including taxes, insurance and maintenance. They have automatic rent increases in the future. Keep in mind cap is only a measure for 1 year. It does NOT include debt. A property with a 4.5% cap will not break even with 30% down. A property with an 8% cap will have a positive cash flow with 20% down. A better method for determining what has value and what does not is internal rate of return (IRR). IRR takes into account multiple years of cash flow, all expenses and debt service (remember cap is 1 year and no debt service and the lower the cap the higher the price). Cap is very easy to figure (probably why it is used so much) while IRR is much more difficult. In addition to IRR one should look at capital accumulation (CA). Simply stated capital accumulation is the amount money that is accumulated during a holding period? IRR is a percentage CA is cash. If you would like more information or a comparison example please send me an emal at paulsylvester@remax.net or call me a 626 485-5163. If you email me be sure and put something in the subject line so I don't think it is spam. Paul Sylvester, CCIM
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Apr 27, 2009
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Joe V.
Owner/Investor
Plymouth, MI

Cashflow is King. If you have to hold a property that is losing money/cash per month, why buy it? You will hear many people talk about the tax advantages as and equity build up as factors to offset a negative cashflow. Wrong! There are too many deals available that you won't need to "carry" to your grave. If the deal has a negative cashflow, change it so it doesn't...or move on.

May 4, 2009
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