cap rate - Posted by ted

Real Estate Investing Real Estate Law
1

Posted by John on July 02, 2008 at 12:41:36:

Hi Ray,

I have read your article on Cap Rates and I have a question. How does one determine what the “cash-on-cash” or “equity dividend rate” should be. You mentioned 20% in your article which I have cut and pasted below. If one makes this too high, then one may end up not buying any properties because the offer would be too low. If one makes this too low, then one risks over paying for a property. Assuming an investor is taking a handsoff approach, namely, he will use property management, and is only interested in collecting a check at the end of every month for his investment. The property is in excellent shape with normal vacancies. What should such an investor require for a “cash-on-cash” return ? How would such an investor determine what his “cash-on-cash” return should be?

Thanks in advance.

Following is the text in your article regarding “cash-on-cash”:

Your return: cash-on-cash return
The next step is to provide for the return on the equity. Start with the return you want on your money: Say the cash-on-cash return you are seeking is 20%. The cash-on-cash rate is also known variously as the equity dividend rate, equity cap rate, and cash-throw-off rate.

2

cap rate - Posted by ted

Posted by ted on May 22, 2008 at 08:12:49:

Could someone explain the proper way to figure out a cap rate!!!

3

Re: cap rate - Posted by J Scott

Posted by J Scott on May 31, 2008 at 21:23:58:

Here’s a tutorial I put together multi-unit financial analysis, including a good bit about cap rates:

http://www.reistartup.com/finance

4

Re: cap rate - Posted by ray@lcorn

Posted by ray@lcorn on May 31, 2008 at 15:48:06:

ted,

See this article for more than you ever wanted to know about cap rates :wink:

http://www.creonline.com/articles/art-216.html

ray

5

Re: cap rate - Posted by brandoncbsre

Posted by brandoncbsre on May 22, 2008 at 13:45:35:

Total up:

Purchase Price
any closing costs
any legal fees to set up entity
any aquisition costs
cash reserves for operating account

Total all this up and divide your NOI into the total of the above.

Example: $100,000 Purchase Price
$20,000 all other costs

Total $120,000

NOI $12,000

$12,000 (NOI) divide into $120,000 + 10% CAP

Cap rate is the return you would recieve if you bought the property without financing.

Hope this helps…Now go out and find some double-digit CAP deals!!

Good Luck, Brandon

6

Re: cap rate - Posted by Matt in SoCal

Posted by Matt in SoCal on June 09, 2008 at 15:17:14:

J. Scott -

Thanks for the tutorial. I was able to follow it well.

I am a long time lurker here on this site, but still a newbie investor.

I read Ray’s before, too. That seems great, but a little advanced for me.

Best,
Matt

7

Re: cap rate - Posted by John

Posted by John on June 02, 2008 at 18:08:40:

Hi Ray,

I have read your article on Cap Rates and I have a question. How does one determine what the “cash-on-cash” or “equity dividend rate” should be. You mentioned 20% in your article which I have cut and pasted below. If one makes this too high, then one may end up not buying any properties because the offer would be too low. If one makes this too low, then one risks over paying for a property. Assuming an investor is taking a handsoff approach, namely, he will use property management, and is only interested in collecting a check at the end of every month for his investment. The property is in excellent shape with normal vacancies. What should such an investor require for a “cash-on-cash” return ? How would such an investor determine what his “cash-on-cash” return should be?

Thanks in advance.

Following is the text in your article regarding “cash-on-cash”:

Your return: cash-on-cash return
The next step is to provide for the return on the equity. Start with the return you want on your money: Say the cash-on-cash return you are seeking is 20%. The cash-on-cash rate is also known variously as the equity dividend rate, equity cap rate, and cash-throw-off rate.