Capitalization Rate?

The Capitalization Rate, otherwise known as (Cap. Rate)

The Capitalization Rate, how does it apply to me, you ask?...
Unless you own commercial real estate that is generating an income, then, it does not.

I have been spending the better part of the morning searching through a pile of real estate DVD's and CD's from Allied Schools , which I purchased second hand on eBay.  And, I finally found the tool with all the answers which I was searching for!  As I have already taken the required three (3) online courses, which now qualify me to take the California Real Estate Exam and obtain a Real Estate Sales Person License, I was hoping to find the perfect cram DVD or testing information.  By the way, Real Estate Principals & Real Estate Practice are both mandatory, however, they give you a choice of a of the third class which you select from an array of Real Estate based subjects.  I choose property management as my third elected class.  I passed all the required classes and have since then, been qualified to take the California Real Estate Sales Person State Exam, which you can find at the California Department of Real Estate and I have to tell you, I do NOT understand how most Real Estate Agents obtain their state licenses!

You have heard the saying "it's not rocket science"???  Guess what?  It is!  This is not easy stuff boys and girls.  I was compelled to share the following brain teaser with you.  Now I know that there are going to be a lot of investors, bankers & brokers who stumble upon this article and just chuckle, thinking all the while to themselves "What an idiot".  So if you are a natural born investment banker... or Rocket Scientist... keep on moving... there's nothing to see here!  Nothing you haven't seen before Einstein!  Okay, now that we thinned out the room, I have a real treat in store for the rest of you!  A real snorefest!

Capitalization Rate, what is this thing everyone seems to be talking about these days?  This magnificent, glorious play on words you ask?  Well... I am going to tell you anyway...

 The Capitalization Rate is the rate percentage calculated out by using the net operating income that a commercial property generates (rent) or (generated income) divided by the actual price which was paid for the real estate, this will give you a number which is called the cap rate or capitalization rate (percentage).

This is the percentage that property managers and commercial real estate agents use to assist them in determining the fair market value of a commercial property.  Any Alberts or Georges still with me that find my statement to be somewhat inaccurate, or complete rubbish, please leave a comment below or forever hold your peace.

So, say you collect rent(s) from a commercial property that averages around $4500 monthly, you would multiply this amount by 12 months and if your good... come up with = $54,000.  And say you paid $1.3M for the property which you purchased just over a year ago.  You would take the $54,000 and then divide that by $1.3M, and if your a property manager or commercial real estate broker you will hopefully come up with .04% or 4% cap rate, which is just a little shy of realizing, that you definitely made a huge mistake in your calculations when you purchased that property!  If your an artist, actor or a writer, you will probably be okay with your investment.

(tip: it doesn't matter when you purchased the property, what does matter is what you paid for it when you did, and how much you can rent it for or more specifically... what you are renting/leasing it for)

Now that we understand one another, you now know that you should have purchased that very same property for somewhere around $500,000... to make a 10% cap rate.  However, you probably will NEVER locate this property!   Because it is the property that all investors are searching for.  However, given, you have very low fixed and variable costs and live in Hollywood, CA.  JK!  (jesting)... you may come to the conclusion that the yearly percentage returned on your investment isn't too bad, as it's yearly generated income is nearly 4% of the asset's total cost, and you should recoup your investment with low operating costs and taxes, within the next lifetime!  Great new huh!  If I've lost you, don't feel bad, I checked out at Capitalization Rate, and this guy gives a much better understanding of "Why Good Cap Rates Mean Great Profits in Real Estate".

Ok... one more interesting bit of information for you, if you have this kind of time or you simply have to make the time to read the recent BOE California Board of Equalization California Property Tax Capitalization Rate Study, you can find it herein, or here's a thought, just for fun... next time your bored  try doing your own taxes that always gets my juices flowing.  GOOD STUFF HERE EH!?