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Wednesday, August 20, 2008

Daily Observations - CAP Rates Revisited

Tonight's observation is almost a review of what's been happening in the marketplace. If you have been a regular reader of this blog you will remember what I stated that many investors are leaving California, and looking towards other states with higher CAP Rates.

As a quick review CAP Rates are the benchmark indicators if an investment will return a significant return on investment. There is an inverse relationship between a capitalization rate and the purchase price of a property as well as the net operating income. As the Rate goes up the property value goes down, and the net operating income as a percentage of the purchase price increases. What that means is a low a price property with a significant net operating income will yield a higher Rate; then a higher price property, would with that same significant net operating income.

The lender will analyze the net operating income as compared to the purchase price to determine the loan to value they are willing to lend on.

Therefore, as the Rate goes up, the loan to value also goes up, which in turn increases the capitalization rate. Because of the economy in California, and the fact that we are in a buyer's market, we are now seeing purchase prices of property decrease as the cash flow remains the same. This means that an investor now can get a better return on their money here in California, versus leaving the state.

I'm not saying at this point that the investors are returning to the market in droves, but I personally believe that as prices drop as they have been doing, the investors will start returning to California, and then market values will once again begin to increase.

Because of this anomaly that is occurring now it might be the best time to look at purchasing property as either an investor or an owner user. We have owner user financing at 90% loan to value and rates in the mid 6's.

For further information, contact us or visit our website loanforbiz.com.

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