Cap rates- or capitalization rates- are ratios used to show the monthly or annual cash flow from real estate rental income. For example, if you pay $1M for an apartment building, and after all expenses (except mortgage), you have $100,000.00 in profit, then you have what’s known as a “10 cap”- or 10% return on your money. This is different than your cash on cash return. If you finance 70% of the $1M, your cash on cash percentage return “before mortgage payments” is different than your cap rate. Further, your cash on cash percentage return “after” mortgage payments is also a totally different number.
Sellers and brokers attempt to apply the cap rate analysis to sales of businesses and alternative real estate investments. For example, a seller will offer his or her business for $1M and show that income is $300,000.00 profit after all expenses- and call that a “30 cap” because you get 30% return on your money if you pay cash. While, depending on the typed of business and assuming you make that rerun, it might be a good deal, I would not call that a “30 cap”. It is simply a term that does not apply. “ROI” applies- but not “cap rates”.
Here’s where it gets more tricky or “gray”. Alternative real estate investments, like a mobile home park, for example, use the “cap rate” terminology. Technically, it is real estate, so the term does apply. But, a cap rate on a mobile home park is not the same as on an apartment building (speaking generally, now- because locations of properties come into play here, also).
A mobile home park in the middle of nowhere may generate a 12% return or a “12 cap”, but, because its in the middle of nowhere, and because its potential to be another type of investment, say, a condominium complex, does not exist, one cannot compare it to a “12 cap” investment in a busy suburb or small city, where the real estate has potential to be a lot more someday.
So, although a “cap rate” is a “cap rate”, when comparing investments and cap rates, part of the analysis is the upside potential of the investment- not just the income. If you compare apples to lemons, what is, otherwise, a good cap rate if it was an apple, may really be a bad cap rate, or simply a bad investment, if it lacks any real potential to appreciate- and its really a lemon, a good cap rate notwithstanding.
Neil S. Siskind, Esq., President
The Siskind Law Firm
Neil Siskind is the Founder & Chairman of The Fatherhood Assignment
Learn more at: http://www.neil-siskind-the-fatherhood-assignment.org/
Neil Siskind is the Conservator of the Neil S. Siskind Nature Preserve
The Neil S. Siskind Nature Preserve is over 7 acres of environmentally-pristine waterfront land in a magnificent setting along New York’s majestic Hudson River. The Preserve includes a variety of species of animal and plant life, and is a precious example of the thoughtful maintenance of New York’s priceless open spaces. The land’s uses are limited to outdoor recreation such as hiking and climbing, and the study of ecology, nature and land use. The Neil S. Siskind Nature Preserve allows for the intelligent contemplation of our valuable natural resources and the most effective ways to maximize them and keep them protected.
Neil Siskind, Founder, “National Fatherhood Day” – March 29th
Read about the non-profits and charities whose missions Neil Siskind supports and promotes: www.neilsiskindsupports.com
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You can read what clients and associates say about Neil Siskind at: http://siskindlawfirm.com/neil-siskind-bio/.
Neil Siskind’s Volunteer Work:
– Memorial Sloan Kettering Cancer Center, Volunteer
– Memorial Sloan Kettering Cancer Center, My Fundraiser- Help Neil Siskindhelp children with cancer to be more comfortable: http://mskcc.convio.net/site/TR?px=3182108&fr_id=2632&pg=personal
– Make-A Wish Foundation- Help Neil Siskind make sick children’s wishes come true by creating your own fundraiser: Neil-Siskind/Help-Make-A-Child-Smile.htm
– DonorsChoose.org- Donate to one of my needy public classrooms: http://www.donorschoose.org/NeilSiskindGiving
– Champion Children– We seek to inspire people through stories of children who have overcome challenges: http://siskindlawfirm.com/neil-siskind-champion-children/
Neil Siskind’s Pro Bono Work:
– Saving Senior Citizens- Protecting New York’s senior citizens from fraud and financial abuse www.savingseniorcitizens.com
– Senior FreeStart Business– Pro Bono: We seek to help put senior citizens in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/
– Veteran FreeStart Business– Pro Bono: We seek to help put Iraq and Afghanistan war veterans in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/
– In development: The Neil S. Siskind School of Hope: A free school to teach inner-city youths the skills of entrepreneurship and importance of economic self-sufficiency.
Neil Siskind’s Government Work:
– Suffolk County District Attorney’s Office, Boston, MA, 1994, Intern
– Office of Senator Christopher J. Dodd, Newington, CT, 1992, Intern
– Hartford County Department of Probation, Hartford, CT, 1991, Intern
Neil Siskind’s Community Assistance:
Financed & operated a legal clinic providing low-cost legal services to struggling Long Islanders during the recession to help clients resolve debt, organize finances, and launch new businesses.
Neil Siskind’s Professional Curriculum Vitae: http://neilsiskind.com/
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