New York City

with cap rates on l o o p n e t . c o m between 5 and 7 how is it possible for anyone to make any profits i've currently been playing with numbers from a couple of properties and it seems like their prices always end up with negative cashflow with the standard of 20% down and a 7% interest rate. should i completely negate cap rates like MikeOH says? should i just propose a price that would allow for cash flow? or is it that these properties are just bad deals. also some of the properties i've been researching are mostly vacant and the agent will use this info as a way to sell a condo conversion. are mostly vacant properties not good for rental properties? is the short term profit just not there?

I just started playing with numbers after reading frank ginelli's book " what every real estate investor needs to know about cash flow and other calculations" and i guess you can say i am overwhelmed. The examples in the book are just that examples and they work because of that. when i plug in these real numbers i just can't seem to find any good properties when cap rates are this low. is new york commercial dead or stagnant cause from what i've read places like astoria and brooklyn as well as the lower east side have a huge market and low vacancies. i need some help please

Edited: 06/26/2010 at 04:03AM

Thomas Jeffers

Real Estate Investor · Cleveland, OH

8 posts
50 influence

Oct 01 '07, 09:13 PM

Hi CK,

I was just reading some articles the other night. They could be a big help to you. One is about " CAP" rate, and it's common misuse. Usually they don't even include your debt service (mortgage) in that number and you also need to have their numbers verified to be sure they are not scenarios but actual expenses and rents. To get an actual CAP Rate, you need to have all the numbers including your financing.

Another problem I see that was addressed is a common mistake. If the units are mostly vacant as you say, what makes you think you can get them rented and make money? Not saying you can't, but if businesses prefer Astoria and the East Side right now, that is where they are going to rent.

If you can, try to look up Ray Alcorn, the articles are by him. Hope that helps.

Edited: 06/26/2010 at 04:03AM

Account Closed

3,396 posts
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Oct 02 '07, 11:08 PM

Tommy,

CAP Rate leaves out financing for a reason. Two investors will have different objectives and different tax situations. The CAP rate is about what the building can produce in terms of a return rather than the cash on cash return (return on equity). NOI covers expenses without financing. CAP rate is just a way to determine the price if you know the NOI or to think about the net return independent of financing.

I agree that people need to look at the details and to understand the impact of financing. It just would not make sense to change the definition of CAP rate when doing the analysis.

John Corey

Edited: 06/26/2010 at 04:03AM

Thomas Jeffers

Real Estate Investor · Cleveland, OH

8 posts
50 influence

Oct 03 '07, 06:28 AM

Hi John,

I noticed you are on quite a few forums that I am on. I am relatively new to commercial as in only one deal. Being new, I found these numbers quite fictitious to deal with which is why I read up some on it.

I agree that if you are an all cash investor, the NOI and CAP rate that you see is an actual figure you can work with. But for most of us who have to finance these deals, they are not accurate. Since CAP Rate is a function of NOI and purchase price, the whole thing is wrong for the investor who has to finance.

You can have a NOI of 594,000/yr and a nice cap rate of 8% but when you plug in the financing it may not work at all. That was the point I was trying to make. Forgive my " Newbie-ness" . It's just a mistake I've seen other new people make to not include all of their expenses when figuring out a deal. But thanks for your correction none the less.

Edited: 06/26/2010 at 04:04AM