These are two common terms you will encounter in commercial real estate investment. I wanted to make sure you understand the difference between them so you are not confused when making a decision.
Capitalization or CAP Rate - the percentage result of dividing the future (or expected) net operating income by the investment.
Return on Investment (or yield) this is a measure of the entire investment, for the entire period of the investment. While you can certainly calculate it on a single year, it is the net present value of all dollars in, and out, taking into consideration exactly when those things happened.
Consider three different investments, which all yield 10%.
A B C
Initial Investment (1,000,000) (1,000,000) (1,000,000)
NOI 100,000 50,000 150,000
Sale Price 1,000,000 1,050,000 950,000
CAP Rate 10% 5% 15%
Quick math shows you that in each case you netted $100,000 on your million dollar investment. But the CAP rate for each is different.
CAP Rate is stated in terms of a year. You want to know what CAP you will get on your investment. But if the investment extends over multiple periods, then you want to know what you will yield over the entire period.
Same numbers above for A, B & C, except :
NOI yr 1 100,000 50,000 150,000
NOI yr 2 100,000 50,000 150,000
CAP Rate 10% 5% 15%
Yield for entire investment 10% 7.41% 12.65%
Use your HP 10BII as follows:
1 Shift P/YR
Shift C ALL
1,000,000 +/- CFj Displays -1,000,000
100,000 CFj Displays 100,000
1,100,000 CFj Displays 1,100,000
Shift IRR/YR Displays 10% and if you change the income & sale it will display the other percentages above.
The difference results from when you got the money, and how much.
If this is too confusing, call me and I will do it for you.
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment