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Thursday, June 19, 2008

Daily Observation - CA Here We Go - Away

What's happening when you cannot afford to buy property in our own home state? My clients are all looking outside of CA, and that's not a good thing for our economy!

CAP Rates at 4 and 5 are causing all deals not to pencil. What's the answer buy out of state, and that is what's happening. When you can find 9's 10's and even higher why would you buy in state.

For those of you who are not familiar with CAP Rates the lower the CAP Rate the more expensive the property and thus the debt service increases. Therefore higher CAP Rates yield lower purchase prices and therefore affordable debt service.

So if you are in a 1031 exchaange and you have to identify properties look out of state. To see how the CAP Rates work take the NOI divide it into the purchase price and that will yield the CAP Rate, or conversely if you know the NOI and you know market CAP Rates that will yield you the purchase price by taking the NOI divided by the CAP Rate.

Read on for a full explanation of CAP Rates

1 comment:

Anonymous said...

Mr. Friedman,

The post on Cap Rates is very interesting for properties with tenants and spaces available for leasing, but what about new developments? Can the forecasted profit be substituted for NOI to come up with a Rate of Return for the new project? Thank you for your time, we're all looking forward to hearing your answer...