Capitalization Rates Can Be Tricky to Determine and to Apply

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All real estate appraisers use the Income Capitalization Approach when it comes to valuing commercial income-producing real estate. This approach determines the Net Operating Income (NOI) of an investment property and divides that number by the capitalization rate or “CAP Rate.” (NOI ÷ Rate = Value). That’s called the “IRV” formula where “I” means NOI, “R” means CAP Rate and “V” equals value. Think of the “CAP Rate” as the return an investor expects to achieve based on the risk they are willing to take. The higher the risk, the higher the CAP Rate. For example, Walgreens does not own…

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High Employment Drives Record Industrial Demand

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High employment and improved consumer spending continues to drive new supply and record demand for U.S. industrial space. According to CoStar managing directors and senior economists Christine Cooper and Abby Corbett, industrial space leasing hit an all-time high of 139 million square feet in the second quarter, outpacing the first quarter by 46%. In some markets, industrial and retail are merging, placing increased demand on distribution networks. The line between industrial and retail are blurring as companies like Amazon try to position its same day delivery service in closer proximity to the consumer. This demand has reshaped the eCommerce industry….

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Leverage Is the Key to Enhanced Investment Returns

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Leverage is using borrowed capital (other people’s money) to increase the potential return on an investment. Leverage, if done properly, will significantly enhance your return on investment. This is easy to do if you invest in income-producing real estate but much more difficult, if not impossible, if you’re investing in stocks or mutual funds. In the stock market, it is difficult to leverage your investment. One dollar buys you a dollar’s worth of stock. Whereas, in real estate, one dollar can buy you four dollars’ worth of real estate because the bank will lend you three of the four dollars…

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Apartments Are A Great Investment

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When it comes to real estate, apartments are considered one of the primary property types along with office, industrial and retail. Generally, apartments with fewer than five units are classified as residential property while apartments with five or more units are classified as commercial property. There are many reasons why apartments are considered a great investment. First, they offer the highest returns out of all the real estate asset classes. A recent study found that apartments dominate holding period returns and risk-adjusted returns for 3, 5, 7, 10 and 15-year holding periods. The study analyzed holding period returns during the…

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The Tortoise Beats the Hare Again!

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The stock market races forward then lags behind while real estate just keeps moving along year-after year making money for investors. Real estate keeps plodding along yielding solid returns year-after-year while stocks lurch forward when the economy is roaring but get easily sidetracked by world conditions be its trade disputes, rising interest rates or a slowing global economy. Things you have no control over. It reminds me of the Aesop Fable, “The Tortoise and the Hare” by Jerry Pinkney. Once upon a time, there was a hare who, boasting how he could run faster than anyone else, was forever teasing…

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Does A 10 CAP Rate Always Trump a 6 CAP Rate?

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I’m raising $5.9 million on an apartment project that costs $23.6 million. I still have a ways to go to get all the equity capital raised. Among the many projects I’ve developed, this is one of the best. The project appraised at $25 million when completed. The appraiser used a 6 Cap Rate to determine the value, which is higher than most apartment projects are achieving. While raising the equity capital, I was referred to a potential investor who had sold a restaurant building and was sitting on $1 million in cash. She was looking for a good investment. I…

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We Are In the Expansion Phase of the Real Estate Cycle?

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Like the stock market, where Bull and Bear markets occur on average every 3-to-4 years, real estate also goes through cycles only of longer duration. In the early 1930s, Homer Hoyt, a real estate economist, discovered that real estate prices seemed to ebb and flow about every 18 years. Famed economist, Fred E. Foldvary, used Hoyt’s theory to predict the real estate crash of 2008. Foldvary pointed out that the cycle does not always function on a precise 18-year schedule but should be around 18 years. One of the primary causes of the Great Recession was politicians demanding banks loosen…

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What Type of Investor Personality Are You?

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There are Six Investor Personality Types: 1) Cautious; 2) Emotional; 3) Technical; 4) Busy; 5) Casual; and 6) Informed Knowing why you make certain investment decisions can help you become a more educated investor. There are several studies that determine investor personality type. The CFA Institute categorizes investor personality types into four main groups: Preservers, Accumulators, Followers and Independents. Barnwell Two-Way Model groups investors into “passive” and “active.” One of the best studies uses Psychonomic Investor Profiling which holds that a person’s propensity to risk is unlikely to change regardless of circumstances. Psychonomic refers to the laws of science as…

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Why Smart Doctors Invest in Real Estate

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Several years ago, Dr. Robert M. Doroghazi, a noted cardiologist, wrote a book entitled, “The Physicians Guide to Investing.” Warren Buffett, chairman of Berkshire Hathaway, said it should be “required reading at med schools.” Dr. Doroghazi makes these important points when it comes to investing: (1) “Real estate should represent a significant position in every investor’s portfolio; and (2) “…real estate should be a core holding” in a person’s investment portfolio. What is it that makes real estate such an important investment that every high net worth investor, not just physicians, should consider real estate as a “core holding” in…

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Who is an Accredited Investor and Why is it Important to Become One?

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Accredited investors receive privileged access when it comes to investing in securities. So, it’s important to know if you are an accredited investor. An accredited investor is a person or business entity who is allowed to deal in securities, which may be publicly-traded stocks or private units in a limited liability company (LLC) or a number of other things, which may or may not be registered with financial authorities like the Securities and Exchange Commission (SEC) or a state securities commission. Accredited investors are entitled to view certain securities offerings if they satisfy one (or more) requirements regarding income, net…

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