Cap rates are loaded ratios. Despite being one of the most commonly used metrics to evaluate and compare real estate investment opportunities, cap rates have their flaws and limitations. You have to unpack them to understand the value they are trying to represent. To gain a deeper understanding of cap rates, we’ll start by describing what they are and then move into comparisons.
One of the first questions, and frankly one of the most important, I typically ask real estate owners who are considering or are in the midst of a 1031 exchange is “what is your adjusted basis in the property being sold?” I dare say that 95 percent of the real estate owners I speak with on a daily basis don’t know the answer to this question.
Location, location, location. We’ve all heard it before and certainly the location of an investment property is a huge driver of the investment’s performance. While it may be easy to spot a “good” location, there are also some locational risks that are often overlooked. From the market the property sits in, to its location within a retail center, location is fundamental to determining why tenants, occupants, and customers are driven to a particular commercial or residential property. As you review and compare different real estate investment opportunities, here are some important factors to consider.
If you have ever purchased or sold real estate, you may have received or been granted a deed in the process. If it was a traditional transaction between unrelated parties, you probably came across what is called a general warranty deed, which provided you assurance as a buyer that the seller owned the property outright, or vice versa. However, it is possible that you have never handled or been issued a quitclaim deed. Although similar in purpose to a general warranty deed, quitclaim deeds have unique features that differentiate them.
Buying and selling real estate should be a fairly simple process. You buy it, it (hopefully) appreciates in value, then you sell it. However, there can be a capital gains tax attached to that profit, meaning your after-tax cash flow (ATCF) could take a hit.
If you’ve been following these blogs for any length of time, you know there are several different ways in which you can invest in real estate. There are direct investments, in which you place your funds directly into a piece of land, second house or industrial warehouse for example.
As of December 2018, The Federal Reserve Open Market Committee (FOMC) had bumped up the federal funds rate for five consecutive quarters. Although Federal Reserve Chairman Jerome Powell signaled a slow down of increasing rates in the committee’s meeting in January 2019, there is still optimism that the U.S. economy will grow in the near future amongst FOMC members, meaning the possibility of further increases in the future.1
In her iconic song “D-I-V-O-R-C-E,” Tammy Wynette sings about the heartbreak of a couple that is separating. Throughout the song, Wynette spells out the difficult words, to ensure that the couple’s four-year-old son remains blissfully ignorant about the parents’ breakup.
When you think of the words “industrial real estate,” what comes to mind? If your first thought involves massive factories and production plants, you’re partially right. Industrial real estate encompasses a wide spectrum of property types, and includes warehouses, manufacturing buildings, and flex properties to name a few. Typically housing multiple tenants, this asset class is becoming a hot investment commodity, due to current pricing, growing demand, and mostly hands-off maintenance.
You are with your financial planner, talking about different ways in which you can boost the power of your investment portfolio. Then he or she throws out the term “risk-adjusted returns” when asking about investment decisions.
If you are scratching your head about risk-adjusted returns, tell your financial planner you will get back to him/her. Then, read this article.