Commercial Real Estate Investing From A-Z What is a CAP Rate and What Should You Be Looking at on Loopnet
Welcome back to Best Commercial Retail Real Estate Investing Advice Ever! Here is the step-by-step guide for your homework in today's episode: https://montecarlorei.com/what-is-a-cap-rate-and-what-should-you-be-looking-at-on-loopnet/
In this episode you will learn what is a cap rate, which is a variable rate that varies per property, and is determined when you are selling the property. As a buyer, you will be looking at various cap rates, and the very basic explanation is that it is the net income on the property divided by the price of the property. For example, there is a property for sale for $400,000 and the cap rate is 8% – this means that your income on the property is $32,000 per year. There are other intricacies about cap rates when you are selling the property, but what you need to know is that cap rates can vary greatly. It can vary by location (state, city, and even where within that city!), by tenant, by current interest rates, etc. A high cap rate is not always a good thing as you will see in this episode.
Cap rates also vary based on where the property is located in a particular city. If the property is in an incredible location, the cap rates are going to be lower, if the property is leased to a national tenant (for example Starbucks, Burger King), the cap rate will still be even lower because your rent is going to be guaranteed and you can easily sell this property. However, when you have a local tenant, and the property is not in such a great location, or is the location isn’t very visible, then your cap rate can be higher because the seller is incentivizing you to buy the property.
Cap rates are also determined by the interest rates on loans: when interest rates are low your are able to lend more money to buy property – meaning you qualify for a higher mortgage – however, when interest rates are higher, you can afford less property because you’re getting a smaller loan. You need to look at all of these things not only when you’re buying, but also when you’re selling a commercial property because when you’re selling that’s when it’s going to determine what the cap rate for the property is.
To elaborate more on cap rates varying by location: for example here where I am in California you can find cap rates as low as 2.5% in Santa Monica which means that you’re making a 2.5% income per year based on the price of the property. You can also find 7% cap rates in some areas of Berkeley for instance. However, in Alabama, you can find cap rates at 10% and that’s because it’s harder to sell the properties there than in California, so the sellers typically want to make the rate pretty attractive to the buyer.
You'll also learn how to evaluate a commercial property for sale at first glance. We are reviewing a property for sale on Loopnet.com and going over all the details you should be looking at such as: how to evaluate what they are describing the property as, understand price per square foot, parking ratio per 1,000 sf, location of the property and how to "walk through" the outside of the property with Google maps, walk score, what to ask for if you think the property could be contaminated, Phase I report, and much more.
Make sure to subscribe to this podcast to continue learning about commercial real estate investing, and if you can please do me a favor and write a review since we are just getting started, that would be wonderful. You can contact me here: https://montecarlorei.com/contact-us/