Tuesday, June 26 2012
The Capitalization Rate (also known as "Cap Rate") is used to compare an income property with other similar income properties. It can also be used to place a value on a property based on the income it generates.
The Cap Rate merely represents the projected return for one year as if the property was bought with all cash. But since we don't normally buy property using all cash we would use other measures, such as the cash-on-cash return, to evaluate a property's financial performance.
The Cap Rate is calculated by taking the property's net operating income (NOI) and dividing it by the property's fair market value (FMV). The higher the Cap Rate, the better the property's income and market value. The Cap Rate is calculated as follows:
Capitalization Rate = Net Operating Income / Value
Let's look at an example. Let's say your property's net operating income (NOI) is $50,000. And let's say that the market value of your property is $625,000. Your Cap Rate would be 8%.
Capitalization Rate = Net Operating Income / Value
As another example, let's suppose you are looking at purchasing a property that has a net operating income of $20,000. From doing a little research you know the average Cap Rate for the area is 7.0%. By transposing the formula we can calculate the estimated market value as follows:
Value = Net Operating Income / Capitalization Rate
An advantage of the Cap Rate is that it provides you with a separate measure of value compared to appraisals where value is derived from recent sold comparables (which are primarily based on physical characteristics). This is especially true when comparing commercial income properties.
Note that a small difference in the Cap Rate may not seem like much but it can make a large difference in your valuation. For example, the difference between a 7.0% and 7.5% Cape Rate, a mere 0.5% difference, on a property with a $50,000 net operating income is a $47,619 difference in value! So be sure to double check the accuracy of your numbers.
As always, you want to look at multiple financial measures when evaluating income property including the cash-on-cash return, debt coverage ratio, and internal rate of return.
Norada Real Estate Investments http://ht.ly/bFbkT
Wednesday, August 17 2011
Do you dream of owning property? Perhaps multiple investment properties from which to earn a monthly stream of income? Ah, the life…
But before you contact your real estate agent, consider what’s really involved. If you want to create an income immediately, you’ll need to rent your property. Though the proposition may sound simple, it is anything but. The information that follows details the downsides to property management.
It’s not meant to dissuade you from moving forward, but instead to show you that there are downsides as well as advantages to buying and managing rental property. Don’t let the potential to earn money cloud your vision when considering whether or not you’re cut out for it.
Read More Here: Issues With Becoming A Landlord
Sunday, April 11 2010
The Wall Street Journal, USA Today, and Parenting magazine give some startling statistics on the financial shape of most Americans: about 70 percent live paycheck to paycheck, about half couldn’t cover one month’s expenses if they were laid off, and 44 percent systematically prepare for retirement by investing. According to USA Today, 3 of 100 people age 65 are financially secure; 97 of them can’t write a check for $600 and 54 are still working. With the federal government now needing to pay back the Social Security System for the $2.3 trillion surplus it borrowed over the years, it’s time to rely on your own ability to save for retirement and not rely on the federal government to take care of you.
One of the best ways to become financially self-reliant is to set up and consistently invest in an Individual Retirement Account. The term IRA refers to Individual Retirement Arrangements established in 1974 by Congress, but everyone uses the term interchangeably with Individual Retirement Account.
Today, the federal government lets you contribute up to $5,000 each in separate accounts for you and your wife. If you’re over 50, you can contribute an additional $1,000, making it $6,000 apiece. For 2009, the contributions must be made by April 15, 2010, so you don’t have much time before the deadline passes. Since you can make a contribution for 2010 beginning Jan. 1, 2010, you could even make your 2010 contribution, if you wanted to.
Most people are familiar with the traditional IRA, which is administered by a bank or stock broker and allows you to invest in money market accounts, certificates of deposit, bonds, mutual funds and individual stocks. Rather than putting your money in a traditional IRA, you might consider setting up a self-directed IRA, which gives you the flexibility to invest in what is classified as non-traditional investments such as real estate, trust deed notes, equipment leasing and numerous other qualified investments. Since your IRA is a separate type of trust account, it should be administered by an entity that is qualified to handle these types of accounts. There are several national custodian/administrators who are authorized to handle such accounts.
The type of IRA account you should consider setting up is a Roth IRA, named after William Roth, the Senator from Delaware who initiated the legislation as part of the Taxpayer Relief Act of 1997. A Roth IRA differs from a traditional IRA in how the contributions and earnings are treated from a tax standpoint. A traditional IRA allows you to deduct the contribution in the year it is made, but then requires you to pay ordinary income taxes on the accumulated earnings in the year you begin taking distributions. Without being penalized, you can begin taking distributions as early as age 59 ½ , but must begin taking distributions no later than age 70 ½. With a Roth IRA, the contributions are not tax deductible, but the accumulated earnings come out tax free. Also, there is no mandate that distributions begin at age 70 ½.
If you haven’t set up a Roth IRA, you should consider doing it this year before April 15, if possible. Setting up a Roth IRA doesn’t affect your existing traditional IRA, however, you can only make the allowed contribution of $5,000 or $6,000, depending on your age. The contributions can be allocated to any or all IRA accounts at your discretion.
The beauty of a Roth IRA is that it allows you to invest in real estate. With real estate prices being at their lowest in years, now is a good time to invest and your Roth IRA can be part of the acquisition. There are some rules, so check with the custodian/administrator you select to make sure you do things right.
Here are the names, contact information and Web sites of two custodian/administrators. The first, Mountain West Entrust, has offices in Idaho and Utah, but operates in 44 states. Their Web address is www.TheEntrustGroup.com. My contact there is John Galane. The second, Equity Trust Company, has offices in Ohio, but operates in all 50 states. Their Web address is www.TrustEtc.com. My contact there is John Bowens.
Setting up a Self-Directed Roth IRA is relatively easy. 1. Go to the custodian Web site; 2. Download the forms; 3. Complete and submit the required information; and 4. Pay the minimal fees and fund the account/s.
Email your questions to firstname.lastname@example.org. We’ll include your questions and answers in upcoming articles on building wealth through real estate investing.