Check out the next podcast in our series on making the most of your investments!
If you’re not very familiar with cap rates and their importance in investment real estate, today Marcia and I explain what they are and how they should affect your investment decisions.
Featuring:
René Nelson, Eugene commercial real estate broker
Marcia Edwards, Eugene residential real estate broker
Making the Most of Your Investment Properties – Part 6
Marcia Edwards: And we’re gonna go deep a little bit on how to value apartments. Now, if this goes over your head or around the side of you there, make sure that you get a number from René at the end of this program so that you know what to do to get the right pricing on the property that you’re considering selling, let’s talk about market cap rates René.
René Nelson: Alright. So I’m gonna try to cook this down in a couple of easy concepts. Cap rate is the net operating income, so it starts with looking at your rent roll and then we take or deduct out your expenses and that derives at net operating income. So for this example, let’s say your net operating income is $100,000, then we look at the market cap rate.
Now, it’s not something easy that you can just go to Kelley Blue Book, a market cap rate is dependent on what’s happening locally, so the California market, we’re seeing cap rates right now at 3.5%, but here locally in the Eugene, Springfield area, we’re seeing cap rates more in the four and three quarters to a five and a half cap, and the reason that it varies is size, condition, age, location.
Marcia Edwards: Now, can I translate that to return on my investment in regards to an interest rate, or what does the cap rate number signify?
René Nelson: The cap rate really signifies… So it’s an easy measurement that a buyer uses to look at a property, and know that’s basically my rate of return that I’m gonna get on my investment, and they’re trying to make that decision because a higher cap rate will show that there’s more risk and exposure. The lower the cap rate, the higher the price. Cap rate and price are inverse. So a low cap rate is a high price.
Marcia Edwards: That’s great. That clarifies a lot. Now, tell me about the market today in apartments and market cap rate.
René Nelson: Market cap rates right now are… Interestingly enough, they’re starting to compress and go down, and I really think that’s just because of the shortage of inventory and the demand, so right now, market cap rates are around 5%, but I recently closed a 100 unit… Little larger than a 100 units, and it was more in the 4.9 cap rate range.
Marcia Edwards: So this is important, this is important to understand your investment, whether you’re selling it now or in the future, to understand what your cap rate is and what the market’s trending. René, we promised a phone number for them to get the idea specific to their property from you.
René Nelson: Sure, 541-912-6583.
René is available to answer your real estate investment questions. Schedule a 15-minute discovery call to better understand your investments and the market today.
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