Real Estate

Cap Rate is Short for Capitalization RateYou have probably heard the term cap rate many times, but what does it mean?  Here’s an easy way to understand the concept as it applies to commercial real estate.  A cap rate is simply the return on your investment if you bought a commercial property for all cash. For example, let’s suppose that you buy for $1 million an office building that is leased out to an insurance broker.  The insurance broker pays you $9,000 per month in rent, but there are also expenses, like real estate taxes, insurance, property management and a small reserve where you set aside money every year to eventually replace the roof and the HVAC system.  Let’s assume your net operating income (NOI) is $77,000 per year. To compute the cap rate at which you bought the building, you merely divide your anticipated NOI by your purchase price.  In this case, $77,000 divided by $1,000,000 is 0.077.  To express this cap rate as a percentage, we merely multiply 0.077 by 100% to produce a cap rate of 7.70%.  In plain English, a 7.70% cap rate means that you – as a passive commercial real estate investor – will earn a 7.7% annual return on your $1 million investment in this commercial property.  Please also remember that for the purposes of computing a cap rate that you should assume that the buyer did not use a commercial real estate loan to finance the property. You can’t use the same cap for every commercial property.  Some commercial properties are far more desirable than others.  For example, let’s suppose that Microsoft Corporation was the tenant on this property, and they signed a lease for 20 years.  Arguably Microsoft is one the strongest credit tenants in America.  If you – as the owner of the commercial property – had a lease with a strong, credit tenant, other investors would be very envious of you.  In fact, they would offer you a lot of money for this property, perhaps as much as $1,800,000. Now remember, the net operating income is still just $77,000 per year.  If you sold the commercial building to another commercial real estate investor, who wanted a very reliable income stream, for a whopping $1,800,000 – he would be buying this same commercial property for just a 4.3% cap rate.  Would someone really buy a piece of commercial real estate with a cap rate of just 4.3%?  Maybe … if indeed the property was leased to a major credit tenant for twenty years.  By the way, a credit tenant is usually publicly traded or a large private entity with a strong S&P rating. On the other hand, suppose you owned an old industrial building in a seedy part of town that was leased to an auto parts manufacturer.  Suppose this auto parts manufacturer sold its parts mainly to General Motors, and the auto parts company wasn’t making a lot of money.  Let’s further suppose that the neighborhood immediately surrounding your property was filled with prostitutes and drug dealers.  Even if this property was generating the same $77,000 in net operating income, you might not be able to sell the property for very much money.  Any potential buyer might think to himself, "Geesh, if I drive over to collect the rents or to check on the condition of my property, I’m putting my life in danger.  Yuck."  This investor might not be willing to buy the property for less than a 12% cap rate.  Seventy-seven thousand dollars divided by 12% is just $641,000. Remember, the more desirable the commercial property, the lower the cap rate a buyer will require before he buys it.

It seems like every media outlet in the country is now talking about the opportunity that low home prices create for first-time buyers. On KQED radio this morning, I heard a report on how military families in Southern California are able to afford homes for the first time in about a decade — and getting mortgages cheaper than their rent. USA TODAY tells us, in an article by Stephanie Armour , that first-time buyers are finding bargains and helping to perk up home sales. And CBS news reports that Florida buyers interested in waterfront property are flocking to foreclosure boat tours! With all this news coverage, these hints of a trend could turn into a self-fulfilling prophecy. People will see that others are buying homes and figure they’d better not wait any longer until prices rise, causing more people to get into the market, causing prices to rise, and so forth. I’m just watching, not advising…

Scanners With Document Feeders Are Becoming EssentialCommercial mortgage loan brokers now only really need three pieces of equipment – a reliable cell phone, a laptop computer, and a combination copier / fax machine / scanner.  The need of a commercial loan broker of a good cell phone is obvious; but have you ever considered whose phone number you are promoting?  Let’s suppose that you send a thousand mail pieces and 3,000 emails every month for two years.  Further suppose your marketing pieces encourage your clients to call the main office number for your broker.  Now suppose your broker goes belly-up.  Oops!  All of those clients and referral sources will be calling a disconnected phone number.  Yikes. Or suppose a commercial real estate agent really needs a commercial mortgage loan for his client.  He calls your office and asks for you, but you’re out of the office.  "Is there another commercial loan agent there with whom I could speak?"  You’ve just lost a commercial loan and potentially a good commercial real estate agent. The moral of the story is this:  Promote your personal cell phone number, not the office number of your broker. Let’s talk about laptop computers.  I recently converted to an Apple MacBook, and I absolutely love it.  No longer do you have to spend hours updating your virus protection software and malware protection software.  Sure, an Apple MacBook costs an extra $600; but the machine so worth it. Don’t worry about software.  Microsoft makes Office software for the Mac.  This means that I can still use the fabulous Apple OSX software and still communicate with my office.  There is Word, Excel and PowerPoint for the Mac, and my staff at our commercial loan office can easily open with their PC’s any file I create on my Mac.  It’s heavenly.  But the machine that gets me hot and sweaty is my new, combination copier / fax machine / scanner with autofeeder.  The other day a broker faxed a commercial loan package to me.  Because the original commercial loan package had been faxed to him, I was working with a second generation fax.  The copy quality was starting to decline. I printed out the commercial loan package and then scanned it using the autofeeder.  I then clicked a few times on my laptop and created a PDF, which I simply emailed to my office.  The quality did not degrade, and my commercial loan officer at Blackburne & Brown was able to issue a loan approval letter the same day. This combination machine was not expensive.  It was less than $300 and I absolutely love it.  It’s a Canon MX700 and I even bought it using the reward points on my credit card.

In this article, I’ll explain how you can easily foreclosed homes for sale in your area. I’ll also tell you how to have this foreclosure data sent directly to your email inbox, without any extra effort from you. Get started at RealtyTrac: Find a Foreclosure Home Now! There’s a flood of foreclosure activity across the United States right now. If you’ve been watching the news at all, I don’t need to tell you the reasons for this. As a result, there are more foreclosed homes for sale in most cities than every before. Here are the latest stats, as reported by RealtyTrac (see link above): More than 340,000 foreclosure filings took place across the U.S. in March 2009 Overall foreclosure activity rose by 46 percent from March of last year There was one foreclosure filing for every 159 households in the first quarter of 2009 For home buyers who are looking for a good deal, this is a positive thing. Sure, those foreclosures stats represent hardship and heartache for some. But they also represent opportunity. And let’s face it — it doesn’t help the economy any to have those foreclosed homes linger on the market. The quicker they are purchased and lived in, the better! Many first-time home buyers see these properties as a chance to save money. And they are right. If you buy a short sale property ( before the actual foreclosure process), you can probably get it for less than market value. And if you buy a home at an auction ( after it has been foreclosed upon), you might even get it for less. The first question most people ask is, “How do I find foreclosed homes for sale in the area where I want to live? And for that matter, how do I find pre-foreclosure homes that might be priced low?” Well, there are several ways you could do this. When a mortgage lender or bank files the initial paperwork to start this process, it gets filed with the county courts (in the county where the home is located). So, in theory, you could make daily or weekly trips down to the county courthouse to find foreclosure and pre-foreclosure homes in your area of interest. But let’s be realistic. It’s just not practical to do it this way, especially in a hot market where a lot of buyers are out shopping for foreclosed homes for sale. Fortunately, there’s a better way to find foreclosed properties for sale in your area. If you use one of the major foreclosure-tracking services, such as RealtyTrac, you can follow all of the activity in your area with very little effort. These web-based services will send you notifications whenever a new filing takes place in the area you are watching, so you’ll be among the first to know about recent foreclosure activity. I highly recommend signing up for such a service, because it’s the only way to compete with savvy investors who know how to snatch these homes up quickly. If you want to find foreclosure homes for sale early enough to make an offer or a bid, then you need constant access to local data. Another reason I recommend RealtyTrac is that they offer a free trial to new customers. This lets you evaluate the service before committing to it, which is always a good thing. So let’s sum up some of the key points we’ve made above. There are record breaking-numbers of foreclosure properties for sale across the United States right now. These properties can be a good opportunity for buyers, because they are often priced below their true market values. You can find foreclosed homes in your area by making regular visits to your county courthouse or clerk’s office, or you can have this data sent to you by email. If you want to compete with all of the other buyers out there, you need to sign up for a service like RealtyTrac — it’s the best way to find local foreclosures in a timely manner.

Despite a recent slowdown, the U.S. real estate market continues to be a popular investment destination for foreign investors. Attracted by a desirable return on investment, many foreign nations continue to invest heavily in the U.S. residential and commercial real estate markets. In fact, in 2005, foreign investment in U.S. real estate reached 1.83 trillion.

To evaluate the impact of foreign investment on the U.S. real estate market, the National Association of Realtors (NAR) produced a 2006 report entitled ‘Foreign Investment in U.S. Real Estate: Current Trends and Historical Perspective.’ The report provides insights into the trends in foreign real estate investment, its impact on the U.S. economy, and the major countries that participate in U.S. real estate investment. Below are some highlights from the NAR report.

According to the U.S. Department of Commerce, the top seven countries that had significant holdings in U.S. real estate as of 2005 were:

Germany – 13 %

Latin America – 13 %

Australia – 11 %

Japan -10 %

United Kingdom – 10 %

Canada – 6 %

Netherlands – 6 %

The U.S. economy is wide open to foreign investors. Both investors and Americans significantly benefit from all this foreign investment. The NAR study estimates that without foreign investments in the securities market, the long-term lending rates would be four percentage points higher than the current rate, which would adversely impact the U.S. real estate market.

Foreign direct investment into the U.S. not only creates more jobs but also contributes to the demand for U.S. real estate. In fact, foreign investment may be responsible for creating two million U.S. jobs by the end of 2006, which further bolsters the demand for U.S. real estate.

Permanent and temporary immigration of foreign-born workers into the U.S. further bolsters the demand for real estate. According to the Joint Center for Housing Studies at Harvard University, 1.2 million net immigrants are expected to arrive in the United States annually. This immigration pattern is expected to offset the decrease in housing demand by post baby-boomer generations.

In summary, the impact of foreign investment and immigration into the U.S. will continue to play a major role in the U.S. real estate market.