# Capitalization Rate and IRR - Posted by Taylor De Laney

Posted by DougO(NM) on February 02, 2000 at 18:00:54:

No. When talkng about the down payment, that is your “cash-on-cash” return.

The cap rate is the income divided by the purchase price x 100.

If you paid \$100,000 for a property that produced 10,000, you could say you bought at a 10% cap rate. If you put 10K down on a 100,000 property and it returned 5,000, the cash on cash would be 5,000/10,000 = 20%

Capitalization Rate and IRR - Posted by Taylor De Laney

Posted by Taylor De Laney on February 02, 2000 at 07:57:19:

Can someone explain what is considered a good capitalization rate and what is a poor rate? Also, I have seen several different methods for calculating internal rate of return IRR. Does anyone have a method that has worked well for them? What should be the minimum expected? Thanks.

Re: Capitalization Rate and IRR - Posted by jim rayner

Posted by jim rayner on February 03, 2000 at 18:40:50:

for a extensive dicussion of IRR see the following article

www.realdata.com/learn_investqual3.htm

Re: Capitalization Rate and IRR - Posted by Ed Garcia

Posted by Ed Garcia on February 02, 2000 at 11:01:04:

Taylor:

There are many ways to look at a deal. Some will look at the Cap rate, others will
look at the cash on cash return. When I look at a deal I need a minimum cap rate,
and then I take into consideration of the cap rates that are enjoyed in the area.
I also look for a deal that would have upside potential, something that would increase
the value of the property.

Also you look at the type of commercial property that you’ll be looking at, considering
the location. For example a mobile home park, would require a higher cap rate than
lets say a Walmart. If you decided to purchase a mobile home park and were looking
at several of them. Your cap rate would vary depending on the location, park rents,
competition, and condition of the park just to name some considerations when looking
at the value of a property. What could be considered a high cap rate in one area, may
be low in another. So I don’t think you’re going to get a crystal clear answer.

Ed Garcia

Re: Capitalization Rate and IRR - Posted by Glenn OH

Posted by Glenn OH on February 02, 2000 at 10:09:15:

I found a book at the library, and later purchased it myself, called “The Income Stream” - A simplified Guide to Real Estate Investment Analysis. It is written by Robert M Goodman. It explains a more refined way to analize investment property than Cap Rate, etc. I would recommend it highly. I know that I now look at properties differently now.
Glenn

Depends on which hat you are wearing! - Posted by DougO(NM)

Posted by DougO(NM) on February 02, 2000 at 09:38:02:

For the CAP rate, which is the return the prperty gives you if it were free and clear, when you are buying, usually want as high as you can get it. So what is good and what is poor is up to you. One measurement of whether it’s good enough is what the rate is on borrowed to finance the project. Say your debt service is costing you 10% If you paid a price that gave you a 9% cap, you’d be losing money, so you’d want to pay a price that at least gives you a spread btween the cost of debt service. In this case, if your debt service was 10%, would you be happy with 12%? 15% It’s all up to you. 10% is sometimes called a “rule of thumb” as it’s easy to do the math in you head. That way you can see where you’d like to be and where the seller is at pretty quickly!

Re: Depends on which hat you are wearing! - Posted by Ben

Posted by Ben on February 02, 2000 at 17:52:51:

Does the cap rate have any relationship to the amount of money used for down payment? For example, if I put \$100,000 down and receive \$10,000 income is it 10% cap rate?

No pun intended, of course!! (nt) - Posted by Glenn OH

Posted by Glenn OH on February 03, 2000 at 14:02:18:

nt