Understanding CAP Rates Can Make You Money! tagged: , , , , , , , ,

Understanding CAP Rates Can Make You Money!

Posted by in Brian's Blog, Commercial Real Estate, Site News, Tip Of The Week

A lot of times you will hear people talk about CAP rates in commercial lending.  When I first started doing commercial, I didn’t understand it and asked a bunch of lender reps.  Very few lender reps even understood it.  They just had a basic idea.  But I assure you, underwriters know about CAP rates – and if you want to close a lot of commercial loans, you better know about it as well.

The CAP rate; or capitalization rate, is the relationship of the net operating income (NOI) of the property divided by the sales price or appraised value.  So a property with $200K of NOI that sold for $2 Mill, sold at a 10 CAP – (200,000 divided by 2 mill). Now, while CAP rates may vary some by city and property type, a general idea of CAP rates will help you screen out deals that don’t make sense.  Knowing the CAP rates can help you estimate the real value of the property you are looking at financing and this can help you determine whether it is even a viable deal.  Generally, I can come within $100,000 on the appraised value on a property just by knowing the CAP rates and doing a simple calculation. 

Most listing flyers and many borrowers think their property is worth a 7 CAP.  No lender in America will give someone a 7 CAP on a property in 2011. In 2007, average pricing was a 7 CAP and in some places like California, you were even seeing 5.5% CAP which is crazy.  A property barely cash flows at that CAP rate.  Today, 10 CAP is the safest number to use when underwriting and the lowest you will find most lenders willing to go is an 8.5 CAP.  Let me show you what I mean by an example….

Say a property has a $200K NOI.  On a 7 CAP that property is worth $2,857,000.  That was the price in 2007 nationally.  On a 10 CAP, that same property with the same NOI of $200K is worth $2 million even.  Today, prices are coming in closer to the 10 CAP number.  When I get a loan and screen it, I calculate my NOI and then divide by .1 (a 10 CAP) to see if we are even in the same ballpark.  Usually, the deal is either close or way off.  IF way off, you just saved yourself a ton of time working on a deal that will never appraise.  If close, you can have a better look.  There are lenders willing to underwrite at an 8.5 CAP so if I was close at 10, I know I can get it done by going to the lenders that underwrite more conservatively.  Our in-house lending goes at an 8.5 CAP rate and so do many local credit unions, and more localized lenders.  And different areas and property types support a lower CAP rate.  But the 10 CAP is a great place to quick screen and see if you are in the ballpark.  When a guy comes to me and wants cash out on his property that he bought in 2007 for $2.9 million, and he wants cash out at $2 million, he thinks he is at a 67% LTV because he thinks his property is worth $3 million though based on today’s CAP rates, it is more likely worth closer to $2 million.  No one will cash him out above 80% which is where he really sits.  Knowing this will save you from doing a lot of work and then getting a low appraisal and having the deal tanked.  It saves you time and money.

 You may still be a little confused, and exploring the full use of CAP rate is too much for this forum but I will be doing a WEBINAR THIS Thursday, Feb. 10th at NOON eastern on underwriting investor deals and will fully explain CAP rates and how to use them to close more deals.  OVER 100 PEOPLE HAVE ALREADY REGISTERED.  This is going to be a huge call. I am doing it exclusively for my net branches and members of www.commercialhotline.net.  And while you cannot join the net branch program anymore, you can join the www.commercialhotline.net website.   Just $199 a month, cancel anytime, and you get conference calls, training, help placing loans and much more.  Register before Thursday so you can jump on this call.  If you just got in on this webinar, it would be worth it.  I closed one investor loan last week and made $50,000.  Just one loan in commercial can do that.  The $199 price is peanuts in comparison to the upside.  I will go over calculating NOI, Cap Rates, everything you need to know to underwrite commercial investor loans – don’t miss this webinar.  To sign up for Commercialhotline.net and get in on the FREE Webinar, click on the link below and go to the store on that site:

 http://commercialhotline.net/communicate/store.php

 Be Blessed!

Brian L. Peart

 P.S.  Tired of deals dying due to low appraisals?  Know exactly where the property will appraise BEFORE you write up the loan by understanding CAP Rates.  I am closing a $1.6 million cash out loan this week, and when I first underwrote it; I came up with a $3.6 million value for the property.  The appraisal came in at $3,550,000 – I was off by only $50K! So even though the client wanted a lot of cash out, I knew I was sitting under 50% LTV and with the large reserves the client had, I knew I could get it done in-house.  My FREE Webinar for Commercial Hotline clients THIS THURSDAY, Feb 10th at NOON Eastern will go over CAP Rates, calculating NOI and really help you close more investor Commercial deals.  Knowledge is power and this webinar will give you the knowledge.  Click on the link above or below to go to the hotline and then join at the store.  This webinar will be worth thousands to you – don’t miss it.  Click on the link and join the hotline so you can tap this awesome webinar as well.

 www.commercialhotline.net