All Forum Posts by: James W.

just curious - are you buying this mill dollar property cash?

if not - what kind of down payment are you putting down and interest rate are you getting?

 Exactly my point is.

The Cap Rate says how much will I make if I walked in all cash.

at 5% Cap Rate - I'll make 50K on a million dollar property - cash.

But the truth is - I dont have a mill diollar sitting cash - and most ppl dont.

My payments on the 75% loan are 750K x 0.04 = 30K.

Now - what I make is 20K a year. 

That's the Return on Investment - ROI=2% a year on asset price.

Add to it that I still pay the principal - so actually - I dont see any cash - until I sell the property !

So you see - Cap Rate is great for comparing two properties - if they were bought all cash.

But its very deceptive when used to indicate how much money is made.

The ROI is the true measure of that.

Thank you.

Yeah. Totally Understood.

i think the idea is to base Cap Rates on cash purchase - so different properties can be compared. And thats pretty useful as I see it now.

Since ROi can depend on factors like interest rate, loan amount, etc. - its not quite comparable. 

So Cap Rate makes great sense to compare properties and get a sense of the regional market.

At the same time though - I think Cap Rate - has the power to mislead a new person.

A million dollar property with 8% Cap Rate is not actually going to give an investor 80K a year - not even close to it - when he has payments due on 75% loaned amount.

As long as investors use the ROI to measure their true income - its more realistic.

As I understand now - the Cap Rate is gives a fair idea about property's returns without its debt and costs, and so is a great tool to compare different properties. And the ROI should be used for true income potential.

I hope this makes sense.

 Hi Winston,

The Purchase Price should be based on GOP - and not NOI - correct?

Because actually - you dont know the NOI - until you first know the Purchase Price.

There will be payments due to your lender on the Purchase Price.

To show this as an example - the rental income of 78K - this should be called the GOP.

Determine Purchased Price based on GOP -

78000/8% = ~1MM.

Now if you took a loan @ 4% on 75% of this purchase price - after making 25% down payment.

Your payments are

1MM x 0.75 x 0.04 = 30,000

So the NOI is

78K - 30K = 48K.

So the effective cap rate i see is

48,000 / 1,000,000 = 4.8%

Is this the right way to think - when I take loan on this property.

...

What I am trying to see here for myself is - that to make 100K a year - what kind of numbers am I looking at.

Out of natural curiousity - and to put things into perspective for myself.

And those numbers look pretty big !

At 2% Net Cap Rate - to make 100K a year - the property has to be ~5MM.

And I'll need 25% of that as down payment - 1.25MM

That's not easy for me - nor very fruitful.

So, I wonder whats the point of this.

In contrast - if you look at flipping houses from a foreclosure - its not uncommon to see routine gains like 50K on a 500K asset. That's after paying interest, commissions and closing costs. 

So that's Net "Cap Rate" of 10%. And 40% return on investment - given that investor puts in 1/4th of the asset price.

 Great point - thank you.

So keeping the cost just to Interest - its 3% a year. 

[1MM x 0.75 (loan amount) x 0.04 (Interest Rate) = 1MM x 0.03 ]

So you see - it seems fair to say - the Net Cap Rate is 5-3 = 2%.

Counting on the down payment - its 4 times - 8% rate of return on actual 250K that investor puts in.

Does that sound about right?

Hi everyone -

I see Net Lease property listings on the internet.

The bigger brand name tenants have Cap Rate of ~5%.

If I finance this property at 4% mortgage interest - is it correct to say that the net return is about 1%.

For example - a $1MM property leased out to Bank of America with listed 5% Cap Rate. That's ~50K a year.

Now if i get a loan on 750K @ 4% - thats just the payment of $3521*12 = 42K a year.

Add 15K of taxes - 57K.

In fact - there's no return at all in this example.

Am I doing this about right? 

 Yes - I think I've heard this before. But am yet to see an example. Hope someone will show this on this thread.

In my mind - paying taxes on 500K - is same as paying taxes on 100K 5 times. 

And I also avoid the paperwork, the process, the constant identification & holding of properties, tenancy etc etc. Abnd gain the freedom of using cash - thats otherwise suck in the walls so to speak.

I am very open to learning otherwise - just need to see how and what really is beneficial here.

 Thanks Bill.

Eventually, I have to pay all these taxes on the final sale - unless I decide to pass on the properties and not see the gain myself - which is also a great goal btw.

But why do 1031 exchange at all - if I want to cash out eventually.

Repeated exchanges would take a lot of time to identify properties, hold them with tenants, pay closing costs, and do a lot of other things to comply with the regulations.

Trying to understand what is the motivation of doing 1031 exchanges - if one has to pay taxes on all the accumulated gains and depreciation recapture eventually anyway.

21 is 21 - and even three times 7 are also 21. Why not just pay them thrice?