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February 14, 2018

4 min read

Real Estate Valuation: Cap Rate and Return on Cost Decoded

While they both provide valuable insights, their application...

Capitalization Rate, or Cap Rate, is a fundamental concept in real estate investing. It's used to estimate the potential return on an investment, helping investors compare different properties before making a decision.

Cap Rate is calculated by dividing the Net Operating Income (NOI) by the property's current market value. Here's the formula:

Cap Rate = NOI / Current Market Value

Net Operating Income is the annual income generated by the property after deducting all operating expenses (but not loan repayments or capital expenditures). The Cap Rate, expressed as a percentage, gives a rough estimate of the return you might expect if you were to purchase the property outright, without a loan.

The Cap Rate can help assess risk and return: a higher Cap Rate could signal a higher potential return, but also a higher risk, while a lower Cap Rate might indicate a lower return and a less risky investment.

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November 29, 2017

5 min read

An Overview of Core, Core Plus, Value-Add and Opportunistic Investments

If you spend any time around commercial real estate...

If you spend any time around commercial real estate, you’re bound to hear the terms core, core plus, value-add and opportunistic real estate thrown around. These terms are used to define the level of risk and return potential of an investment property. Not only are the physical attributes of the property used to define an investment but the amount of debt financing to support the project is also imperative.

To explain why the debt financing has such an important role, I find it easy to understand if you look at a single-family property. If a property has a long-term lease in place, it can sound attractive to a conservative investor who wants to play it safe. However, if the same property has been primarily financed through debt with very little equity, it can paint a very different picture. Should the property value decrease, the owner could end up owing more on the property than it’s worth.

As a commercial real estate investor, you should know about each of these terms. Let us take you through them one by one to help you understand them better.

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