Cap Rates- a useful analysis tool?

[MaryJ]

I'm just working through Steve Berges' book 'Real Estate Finance for Investment Properties'. As I have always regarded myself as 'mathematically challenged' this is not exactly an armchair read.

One of the important measuring tools that this book has introduced me to is the cap rate.

When would you typically use the cap rate to analyse deals?

Does anyone have rule-of-thumb expectations of cap rates in the present market for multi-dwellings in Wellington/Auckland/Christchurch?

Is this the best RE investment book available or do you recommend a different one?

Cheers
Mary

[MaryJ]

Erm...Ms Red-Face has just worked out that cap rate is the same as net yield

All the same, I can't quite work out why the net yield should be a better instrument to compare property prices, than -say- gross yield.

[Mark_B]

Whether it is a better instrument ultimately depends on your modus operandi.

It is different instrument - one that allows you to take account of factors like maintainence when making your investment decision.

(Other factors include: rates, insurance, expected vacancy levels, PM fees, etc.)

Imho alot of people who focus on gross yield are driven purely by numbers.

A gross yield of 14% is a yield of 14%.

Never mind that the property is almost derelict, it has 4 walls and a roof and I don't plan to spend a cent maintaining it.

Some people operate like that.


M

[fudosan]

While calculation of gross yield is simple, it does not take into account the great variation of expenses according to the type of property. For example, apartments on leasehold land in Auckland CBD usually have very high body corporate fees, so a net yield (or cap rate) will give you a better picture.

[roseneath_rat]

A cap rate is similar to a net yield for commercial property (yield after expenses). It's really something that is used when looking at longer term discounted cashflows to see if your purchase will meet your investment criteria. A number of folks (myself included) here can provide you with discounted cashflow calculators in MS Excel that compare your expected internal rates of return against cap rates.

[MaryJ]

A number of folks (myself included) here can provide you with discounted cashflow calculators in MS Excel that compare your expected internal rates of return against cap rates.

That would be very helpful! I'll get in touch.
cheers
Mary