After very fine suggestions from many of you, I am revising my blog. Details later.
Thanks for your many responses. Keep them coming. Send an e-mail with any other suggestions or questions to:
dontishman@gmail.com
Friday, June 20, 2008
Wednesday, June 11, 2008
The next topic is capitalization rates or cap rates
cap rates are the % return that an investor will buy a specific type of property for.
You might also say that the cap rates determines the market price for a particular use in a specific location.
Say an apartment has an annual Net Operating Income(NOI) of $100,000.
NOI is the rents-vacancy-operating expenses.
WE divide the NOI by the cap rates.
If the current cap rates for garden apartments in Anytown,USA is 9%
Then the value is 100,000/.09 = $1,111,111
If the cap rate for this garden apartment is 10%
Then the value is 100,000/.10% = $1,000,000
Suppose there is shortage of garden apartments because of a huge demand- the cap rate is 5%
Then the value is 100,000/.05 = $2,000,000
Clearly, the lower the cap rate , the higher the value.
Next time we will examine some of the factors that determine cap rates
Tuesday, June 10, 2008
Frequently I am asked how can I determine the value of income producing property?
Some suggest the replacement cost or construction cost. This is irrelevant.
The VALUE of incoming producing property = the value of it’s future income. You get a pro-forma from the seller or broker which shows their version of the future income. How accurate is this?
This determination is going to take a serious effort on your part. You first must examine the assumptions that this pro-forma is based on. What are the market rents for this type property in this MARKET PLACE? You have to do a survey of rents in the area. Considering the market rents, are the projected rents reasonable? Inflation has been a constant factor since the Civil War of about 2%. What inflation factor is used for the income?
Next examine the expenses as you did the income-what are typical expenses for this type of property in this market place? Where do you look for these? If your doing rental apartments, the National Association of Realtors in Chicago publishes each year a compilation of operating expenses for all types of rental units in for each part of the country. This is excellent.
The International Council of Shopping Centers(ICSC ) and the Urban Land Institute(ULI ) jointly publish annually the Dollars and Sense of Shopping Centers. This a wonderful encyclopedia of retail operating costs.
The Building Owners and Managers Association(BOMA ) annually publish statistics for office buildings operating expenses.
The older the building the higher inflation factor for operating expenses.
The result of the foregoing research will give a figure for Net Operating Income(NOI ).
This is the basis of value!!!!
You do the NOI for each year of the pro-forma . Now we decide in what year we might sale this
property.
Now we divide the NOI by the applicable capitalization rate(cap rates) to project the value.
In our next session, i will talk about capitalization rates, their importance, and how to best determine the applicable cap rate for determining your value.
Monday, June 9, 2008
I HAVE BEEN A REAL ESTATE DEVELOPER FOR THE LAST 45 YEARS WORKING IN 30 + U.S. MARKETS.
FOR THE MORE THAN 30 YEARS I HAVE TAUGHT COURSES ON REAL ESTATE INVESTING AND DEVELOPMENT. I STARTED AT OHIO STATE UNIVERSITY, THEN TO THE UNIVERSITY OF CALIFORNIA, AND FINALLY FOR THE LAST 18 YEARS AT THE UNIVERSITY OF NEW MEXICO WHERE I CONDUCTED A GRADUATE SEMINAR ON REAL ESTATE DEVELOPMENT MANY OF MY STUDENTS HAVE BECOME INVESTORS AND DEVELOPERS. THROUGH OUT THE YEARS, I HAVE FREQUENT CALLS FROM FORMER STUDENTS WITH QUESTIONS ABOUT “DEALS” THEY ARE WORKING ON.
THIS BLOG IS A CENTRAL CLEARING HOUSE FOR QUESTIONS FROM MY FORMER STUDENTS OR ANYBODY ELSE WHO HAS A QUESTION ON DEVELOPING OR INVESTING IN REAL ESTATE. I HOPE THAT I CAN HELP YOU BY ANSWERING YOUR QUESTIONS.