capitalization rate!!!!!!!!!!!!

How do you determined a capitalization rate? I was curious what is the current capitalization rate for a home right now? Since I want to determine a house value and I know it's based on capitalization rate, then how do you know what the cap rate is in order to determine home value?

Edited: 06/26/2010 at 05:01AM

Bob McIntosh

Real Estate Investor · Hoboken, New Jersey

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Icon_minipost Apr 08 '08, 02:52 AM

Cap rate is defined as:

NOI / cost (or value) = Capitalization Rate

*Edit to clarify*

Edited: 06/26/2010 at 05:01AM

Michael Rossi

Real Estate Investor · Ohio

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Icon_minipost Apr 08 '08, 05:49 PM

If you're talking about a single family house, cap rates do not apply. You can calculate it, but you won't find meaninginful cap rate data and so it's an exercise in futility. The value of single family houses is determined by comps, not cap rate.

Mike

Edited: 06/26/2010 at 05:01AM

NC Mark

Real Estate Investor · North Carolina

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Icon_minipost Apr 08 '08, 06:21 PM

tinqlam:

Are you referring to a home that you will use for a residence? Or a home that will be used for rental?

If this is for a residence, MikeOH stated you may use market sales comps to determine a value; you may also pay for an appraisal, or get a real estate agent's opinion.

If this is a rental, you may use the previously stated formula.

However, if you are wondering whether there is a 'standard' cap rate for single family home rentals, I don't know if there is any nationwide average, like one can find for apartment buildings.

(If anyone knows of such a resource for SFHs, please post it!)

For my potential rental homes, the cap rate I want will differ from property to property, depending upon such factors as management headaches, location, appreciation potential, anticipated maintenance costs, etc.

Then, to help keep me grounded, I compare that rate with what I can get from CDs, or a nice broad market mutual fund.

Plugging numbers into a formula is the easy part. The beauty, and danger, of real estate investment lies in the fact that it is as much 'art' as it is 'science'.

Edited: 06/26/2010 at 05:01AM

Steve Steadele

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Icon_minipost Apr 09 '08, 01:11 AM

Do yourself a favor and don't get to tied up in the cap rate. Buyers are cap rate crazy. It's only one of the many value indicators and if you do it wrong it means nothing. I've seen a lot of investors walk away from a great opportunity because they didn't think the cap rate was high enough. I've seen others buy a property at a high cap rate and the property was nothing but a money pit. So be careful - there are a lot of ways to make money. Assessing value involves much more than a " standard" cap rate. It can lead you in the right direction if it's done correctly, but I wouldn't make my decision based on the cap rate. Again, it's just one indicator.

Edited: 06/26/2010 at 05:01AM

Matthew Gil

Real Estate Investor

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Icon_minipost Apr 09 '08, 01:12 AM

Mike is right, Cap Rate means squat when it comes to SFRs. But, if you want to learn more, knock yourself out...

http://en.wikipedia.org/wiki/Capitalization_rate

Also, cap rates are a very regional value. Yeah, we'd all like to purchase a 20-unit with a cap rate of 18, but good luck finding that in a major metro area. Example, a cap rate of 9 would be a steal in the City of Chicago, yet to me it is a total ripoff.

Edited: 06/26/2010 at 05:01AM

Michael Rossi

Real Estate Investor · Ohio

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Icon_minipost Apr 09 '08, 02:06 AM

Keep in mind that cap rate is just a way of determining market value. If you buy a rental at market value, you're buying at the price that the failures buy at and it will not cash flow. So, even if there were an accurate market cap for SFHs or small multis (there isn't), all the result would tell you is what the failed landlords payed for their rentals. You would still need to buy at a big discount if you want to buy cash flow. Even if you're buying for appreciation and are willing to accept negative cash flow, why pay full price. Surely, you could do a little work and find a property at a discount.

Mike

Edited: 06/26/2010 at 05:01AM

Will Barnard

Rehabber · Santa Clarita, California

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Icon_minipost Apr 09 '08, 11:07 AM

Getting back to the original question, cap rate has nothing to do with single family homes as Mike mentioned. Cap rates are one calculation for valuating commercial properties, not sfr's or even duplex units. It does not matter if it is your own home or a rental. SFR's, regardless of owner occupied or not, are valued based on comps.

A far as a National average of cap rates (even if sfr's were measured that way), would do you absolutely no good. It is the same as NARS (National Assoc. of Realtors) exclaiming the national appreciation average of homes. Who cares! The only thing that matters is what the appreciation rate is for your sfr, in your subdivision, in your town, in your city, etc. There is no need to calcualte national averages even if you were to own 100 homes in each of the 50 states.

Edited: 06/26/2010 at 05:01AM

Will Barnard, Barnard Enterprises, Inc.
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