East West Commercial Real Estate

www.privatemoneyusa.com A lot of times you will hear people talk about CAP rates in commercial lending. When I first started doing commercial, I didn’t understand it and asked a bunch of lender reps. Very few lender reps even understood it. They just had a basic idea. But I assure you, underwriters know about CAP rates — and if you want to close a lot of commercial loans, you better know about it as well. The CAP rate; or capitalization rate, is the relationship of the net operating income (NOI) of the property divided by the sales price or appraised value. So a property with $200K of NOI that sold for $2 Mill, sold at a 10 CAP — (200000 divided by 2 mill). Now, while CAP rates may vary some by city and property type, a general idea of CAP rates will help you screen out deals that don’t make sense. Knowing the CAP rates can help you estimate the real value of the property you are looking at financing and this can help you determine whether it is even a viable deal. Generally, I can come within $100000 on the appraised value on a property just by knowing the CAP rates and doing a simple calculation. Most listing flyers and many borrowers think their property is worth a 7 CAP. No lender in America will give someone a 7 CAP on a property in 2011. In 2007, average pricing was a 7 CAP and in some places like California, you were even seeing 5.5% CAP which is crazy. A property barely cash flows at that CAP rate. Today, 10 CAP is the safest number to use when underwriting and …