Re: How The Rabbit ate the cabbage… - Posted by Ed Garcia
Posted by Ed Garcia on May 16, 1999 at 16:57:53:
Sean:
My name is Ed Garcia. I am an Investor, Lender, and Broker.
There are many people on this forum that if they tell you something,
you can take it to the bank. The two who have tried to help you was (1)
Jim Piper, and (2) Joe Kaiser.
Joe , normally does not get sarcastic nor does Piper, unless you drive them
to do just that. Both men are extremely fair.
Let me see if I can help you clear this matter up once and for all when it
comes to Cap Rate, or calculating an income stream on real-property.
Houses:
Are purchased on the basis of equity position, or cash flow.
You could look at it on a cash on cash return, but that would be deceiving.
The reason I state equity position first, is because you always make your
money on the buy. If you purchased with a good equity position,
everything else falls in place. Obviously the less you owe on the property
the more cash flow you would have.
Multiple Units:
Are purchase on the basis of GRM, ( Gross Rent Multiplier) or Cap Rate,
(Capitalization Rate).
GRM- A number which, times the gross income of a property, produces
an estimate of value of the property.
Example:
The gross income from an unfurnished apartment building is
$200,000 per annum. If the appraiser uses a gross multiplier of 7%
Then it is said that based on the gross multiplier the value of the
building is $1,400,000.
Cap Rate- The rate of interest which is considered a reasonable return on
the investment, and used in the process of determining value
based on net income.
It may also be described as the yield rate that is necessary to
attract the money of the average investor to a particular kind
of investment.
In the case of land improvements , which depreciate, to this
yield rate is added a factor to take into consideration the
annual amortization factor necessary to recapture the initial
investment in improvements.
This amortization factor can be determined in various ways:
(1) Straight-line depreciation method.
(2) Inwood Tables and (3) Hoskold Tables.
(To explore this subject in greater depth, the student should
refer to current real-estate appraisal text)
In conclusion the majority of investors that I know, usually figure
purchasing Multiple Units on Cap Rate.
However after saying that many lenders don?t.
I think it would be safe to say the larger projects would be figured on
Cap. Rate, and the smaller ones would be figured on GRM.
Commercial :- Good News Sean, they?re all figured on Cap Rate.
So you see Sean, you had the right answer, just the wrong property.
Ed Garcia