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!?

"US Banking" We have a win! Win! Situation... Conspiracy Theorist!

Over the past year there has been so much talk regarding the recent Real Estate market and it's downhill turn, as well as the US Banking Bailouts! I just finished "Capitalism: A love story" and I must say!!!! Brilliant!!!! Michael Moore for the most part has his foot on the throat of our entire bureaucratic government and their political B.S., exposing government in general, for what is actually taking place! As I was growing up over the years, I learned at a young age that the "Conspiracy Theorist" was that "crazy idiot", who was psychotically paranoid! Insinuating ridiculously absurd scenarios. An individual in desperate need of an quiet institution to rest his obviously overworked mind. This is the guy who went around spreading untruths about our well managed governmental systems! Government cover-ups and theories which are so out of this world at they have to keep them under lock and key in area 51! How do I know this guy is off his rocker and spreading untruths you ask? Because, my government tells me so! And portrays this guy to be absolutely NUTZ! And this guy is DANGEROUS TOO! Of course we want the American people to be comfortable with and believe in the US Government, and never question whether or not the US governmental system is doing what is right for our country! Without a solid belief, then, there is doubt... we must never allow this type of "free thought" for it leads to questions, questions which can not be answered truthfully and ultimately answers which can not be justified with facts! Truthfully accurate knowledge is all powerful. Without truth, we have lies, without knowledge, we have ignorance and with ignorance and lies we do not have any idea where to start, nor, do we have the tools to make choices. The tools necessary to make accurate choices, which ultimately lead to the right changes! And hence we have corruption! Economic meltdown! Sinking ships! Tanking companies! Burning beds! Governmental diversion of accusations <-> ... The American people must believe they are free, free vote, free to make a difference, free to elect their chosen officials, free to make a change! Unless what they wish is to change our pay and our system... then we have a problem! Okay enough of my negative venting! Here is the scenario... The banks never actually lost ANYTHING at all in this financial meltdown! Nor, did they need a bailout at the least! The way I see this situation is: There are a handful of major banks in the US, you have your Citibank, Wells Fargo and your Bank of America, they are the top three players, then, there are quite a few smaller banks which have dropped off my radar at the moment. Ultimately the major contenders are the ones listed here, the ones who asked and received the "Tax Payer Bailouts" right? So, when you got a loan for your home who did you use? And if you ever refinanced, you probably used one of them if you had decent credit score right? So, if these guys are giving you a loan to purchase an older home or a newer home then, who is this loan going to anyway? You did not receive that money personally did you? Unless you refinanced... that is a different story all together. So, ultimately whom ever you purchased the home from was probably a subsidiary of one of the larger banks listed above and in someway a sister company of sorts. Okay, so with all three major brands disbursing and receiving hundreds of thousands of loans in conjunction with each other, then... at the top of the housing market crash you would think that it would have been for the most part a wash between the big guys. It's like this... I bought a bicycle from you for $200 and you resold it to someone else for $200... but you charged interest right? And you probably did not resell it for the same price as you paid, especially with bicycles being so difficult to obtain in this booming market! Okay, lets say you did resell it for the exact same price... so, then you just broke even right? Well you probably make a little more with the interest payment for the past year or so right? And now that guy you sold the bicycle to lost his job and can't afford to make the payment of $6 a month. So, you decide to repossess that same bicycle. He paid you $6 a month for over a year and a half to finance it, and you charged him 6% interest, so, you ultimately received $240 USD! And now you get to take the bike back and then re-sell it??? And you feel you need the tax payers to help ya out since you lost money in a bad finance deal, and you are going to have to re-sell that bicycle at half the price which you sold if for previously?... poor you! Case and point.

Note to: Jeff Lewis

I dabble in Real Estate and am becoming quite good at it, however, Jeff Lewis is quite a master in the field of fix it and flip it as well as interior renovation and design in some of the most beautifully clean and modern multi-million dollar renovations which I have seen. I would truly love to meet with this guy and share thoughts and ideas with him, possibly work for him in some capacity, preferably a conscious one. The first time I had watched his show, I was disgusted by what seemed to be his "Pre-Madonna" personality, and I was so disgusted that I just had to watch one more time. I could not believe that an individual would come off as such a Pre-Madonna on air, in front of millions of individuals watching, and actually not care about some of the outlandish situations and comments he had created for all to view. Watching that second episode was the ring thru my nostril... I was hooked after the second episode and now... well, I am a full blown addict. I guess I just got that this guy is brilliant! And watching more and more, I see that he is truly all about the show and enjoying the people in his life, although that image is not one which he projects often in the show. It is obvious that he has a sarcastic sense of humor and for the most part he is a great individual. I recently posted a comment on his Facebook: "Jeff, would it be possible for us to meet sometime for potential job placement within your staff? Payment is not necessary, the experience of being verbally beaten within an inch of my life on a daily/hourly basis would be payment enough for myself". I must say that now... I love this guys sense of humor!

I heard the news today oh boy!

OK, we have officially started to turn this sinking ship around, and all pumps are set to max! You can almost hear the rush of the water as it vacates the empty hull of the vessel. It will take another year or so before we see prices starting to climb for the home owner who would like to sell. As it seems many, many more "Bank Owned" properties are about to hit the market once again as the next wave of foreclosure properties are listed. For the home owner that would like to sell, your time will come, but not for a year or so from now... however, I would not sell even at that point. Hold on for a few more and I believe things will be much, much better for everyone! And until then... do everything you can to get your piece of the American dream! Right now, home prices are at the bottom, in fact, they were there a couple of months ago. There is a LOT of competition out there right now, but, if you are a first time home buyer willing to pay the price to get that bargain home at a slightly higher price than the investors are willing to go for an investment property. Then, bid at least 20 to 30% higher than asking and with a bit of the "luck of the Irish" you may just be a first time home owner, or the proud owner of the home of your dreams. Get them now while they are hot! And lock in your taxes on the lower re-assessment now! After all, when the home prices go back up, so do the taxes, which are assessed at the time of purchase. So, it is truly in your best interest to get that home at a third of the price it once was just two short years ago. Good luck!

A turn for the better...

Over the past couple of months I have witnessed signs of the economy slowly making a turn toward recovery. Home sales are on the rise as well as the demand for the more sought after properties, in turn driving the prices right back up, and creating a demand and somewhat of a mad rush to pick up the best properties available in this investor's market, which the banks now seem to have the upper hand! Traditional home buyers are still a bit choosy about how much they are willing to spend of their hard earned money, and or how much they are willing to compromise on when it comes down to purchasing a home. Sales in that aspect are still a bit spotty, however, it seems that over all the market is making that turn for the better... due to the over saturation of investors who are realizing their great potential from this ravished market, and their inevitable future profits from a "rock bottom market". So, I hope everyone is looking for and purchasing the home of their dreams right now! Because these prices are on the rise and with prices and competition going up rapidly, many may miss out on that once in their lifetime chance at home ownership! And others may miss out on that affordable investment/income property. This recent recession and or depression, will hopefully prove to be a once in a lifetime happenstance. The circumstances behind this "perfect storm" will most likely not occur for another 100 years or so, or at least not until most have forgotten what it took get us here in this position in the first place.

Mark my words... Buy two they're small!

This recent flood of "Bank Owned" property combined along with the ridiculously low asking price and the surprisingly "good" condition of many of these homes has prompted me to advise almost anyone who is able to afford it to "take two, they are small". I am predicting that approximately 1 and a half years from this date April 28, 2009 that the real estate market will soon regain approximately 55-65% of what it has lost in value in just under a year now. The market should start to compete in a similar arena in which it did back in 2006-2007. Just as soon as most of the decent "Bank Owned" properties have been bought up and held by all the investors & home owners who were able to catch one of these great deals! And the prime properties which were purchased will be few and far between, it is then at this point in time which home owners and investors alike, who had purchased intelligently, will be able to almost name their price for their wise investment(s). I see more and more individuals out there just in the past two months, starting to compete with one another on bids for these homes! There are multiple offers where once the Banks were lucky to get any. Yes, it was a very dark and depressing time back in December '08 - February '09. And now! Well it is not quite the case any longer! If you are out there looking, stop looking and start buying! They are moving much faster than you would assume! Good luck! -R

"Recession Turn Depression"

I had a few more points to stab at you, that did not make it in the final cut of the previous posting "Moving right along... Today's Economy".

There is a bit more to interject here, to completely and accurately depict my lengthy synopsis of the recent economic recession.

Being that of the problem lies blame to "word of mouth", and the government's lack of media interjection or lack of information which should have been immediately interjected by government officials and broadcasted thru media. With a country so strong and looked at as such a predominate driving force behind the entire global economy, you would imagine that we would be much more organized and professional about the currently mishandled events. If government had organized with media and worked closely along side one another, we most likely would not be anywhere near the place we are at this current time. However, another major factor in this "psychological recession" is the "Real Estate Market" itself!

Yes, the Real Estate Market does in fact play a major part in the circumstances which lead up to our current state, however, when you dissect this beast meticulously, you will inevitability see that our "Modern Day Depression" truly could have been contained, whereas the banks would have been the only casualties or victims affected by these "Toxic Mortgages". If someone had done their job,(I would say properly, however, the job appears to have not been even done at all!) to head off the damage done by the "Bank Owned Properties" and contain the situation from it's toxic runoff, then, we most likely would have not been in the stew we are in today! With so many properties being foreclosed upon, it does not make ANY sense whatsoever that the "Banks" would not have adapted to what was inevitably about to occur. And government would not have immediately interjected at the root of the problem! Banks are/were in the position to have not lost anywhere near the amount of currency which they have at this point. There are two major things which could have been done to prevent the amount of loss they have incurred. Banks could have adapted to their current situation by doing the EXACT OPPOSITE of what they actually have done up to this point in time. The banks could have weighed their loss options and projected both possible outcomes.

1. Work with the home owners who were about to loose their homes and interject with an assessment of whether or not they are actually able to pay their current payments, and if not, re-adjust their terms, either percentage rate, or temporary payment reduction. Even, possibly add or roll a year or two onto the mortgage if necessary to recover some of their discounted loss.

2. Foreclose upon and hire "Property Management" for all the potential "Rental Properties" which they were about to inevitably acquire. This would have been a wonderful tool to head off the decline in market value of the homes.

Another factor in our current state was, and still is, the American Vehicle Manufactures. The entire situation was brought upon by the banks as well. Which was a direct result from this "Landslide Effect", which originated with the "Decline in the Real Estate Market". And spilled over onto the creditors/banks which then began the bleeding, continued on... and left unattended, eventually erupted into a "MAJOR BLEEDING OUT" of our financial institutions. Creditors/Banks froze their extension of credit to the consumer & businesses alike, which in turn, directly affected the sales of our vehicles, manufactures, stores, distribution, fuel sources, insurance companies and right on down the line! Our entire economy is affected, entwined with one another and driven by, not one facet, but the entire conglomerate of economic structures which work together, as one gear is driven by the other. However, without an source to propel the gears, they lie dormant.

That is all I have for now... however, with a topic like this one, I am quite sure I will be blogging a bit more later on.

-Richard Peacock