Not All Cap Rates Are Created Equal!
Capitalization rate (or “cap rate”) is the ratio between the net operating income produced by an asset and its capital cost.
Very frequently an investor will come to me asking what kind of Cap Rates my company offers. This is an important question, but one that also frustrates me a great deal. The frustration stems from the fact that the Cap Rate is derived from 2 numbers, the purchase price, and the NOI (net operating income).
While the purchase price is easy to factor into the cap rate, the NOI is where things get a little tricky.
Head Ache Free Real Estate operates very differently than just about every other place that has investment property for sale. The main difference is that our NOI actually includes ALL of the expenses. Literally every other place that I have looked does not include all of the expenses. I invite you to look around and compare them to us.
Due to the fact that we pride ourselves in providing a truly comprehensive picture of the income and ALL of the expenses, our NOI will appear lower than some of the alternative properties. This can be the case EVEN WHEN OUR NOI IS ACTUALLY HIGHER.
NOI and Cap Rates have to be apples to apples to get a true comparison. Unfortunately in the world of investment properties, most sellers will not show you the full picture.
Aside from understanding all of the expenses involved in operating a property one must also look at the condition of the property as well. This is not a question of whether it is pretty or not. The important factors to look at are the main mechanical systems like the plumbing and the electrical components along with the structure of the building. Purchasing a building with a great Cap Rate but also a lot of deferred maintenance won’t do you any good as an investor, as addressing these issues can destroy your ROI.
In summary, when you are shopping for a good Cap Rate, make sure you are comparing apples to apples. I like to say “an 8 CAP at Head Ache Free Real Estate is equivalent to a 15 CAP on the MLS.”
