THE CAP RATE AND LOAN TO VALUE (LTV)

FOR “NEWBIES” TO REAL ESTATE INVESTMENT – VALUING THE PROPERTY AND THE MEANING OF "CAP RATE" AND LTV


Let us begin with the purchase of an multi-family (apartment building). The same principals would apply to mixed use properties, self storage facilities, mobile home parks, office buildings and other real estate investment properties. Remember the term "cap rate." It stands for capitalization rate. One fact never changes….. Paying too much for a property will mean disaster.

A cap rate that is too low means that you may be paying too much for the property and it will take you longer to earn back your investment. The cap rates listed below are often used by lenders when making loan decisions. You may allow yourself some leeway if you have a very strong reason to believe the property is worth more.

A "9 cap rate" is a number considered fair and workable by many lenders when loaning on multi-family (apartment) properties. Occasionally you may be able to go as low as an 8.0 cap rate on apartments, but this should be the exception not the norm.
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A "10 cap rate" is a number considered fair and workable by many lenders when valuing many other types of income properties such as mobile home parks, office buildings and strip centers.

To calculate the cap rate divide the asking price by the Net Operating Income (N.O.I.). Example: If the asking price for the property is ?750,000 and the N.O.I. is $90,000 then the cap rate is 8.3.

You’ve heard the term loan-to-value (LTV). It simply means that the commercial property lender will loan a percentage of the best estimate (fair) value of the property to you so that you can buy your multi-family or other investment property. An LTV of 80% means that the lender will finance 80% of estimated value and you will have to contribute 20% as a down payment. The catch is the "V" in LTV. The "V" stands for VALUE. The lender, using a professional appraisal as a guide will place a value on the property. It doesn’t matter what you think the property is worth, or what the seller thinks it is worth; what matters is what the LENDER feels it is worth.

Just a word about buying properties in “hot” real estate communities. You may be looking for properties where the seller is asking a price that calculates to a 6 to 7 cap rate. He wants you to buy an overpriced property simply because the local properties are selling far above the national average. Why should you buy a property at a price that will cause you to wait many extra years to get your investment back? Stay away from investing in properties in such communities. Limit your investment in so-called “boring” communities with selling prices near the national average.

Good luck with your search for the real estate investment property which is right for you By Joseph Spatola III President Barclay Associates barclay@netcarrier.com
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MINIMUM LOAN AMOUNTS

  • INVESTMENT PROPERTIES - COMMERCIAL MORTGAGE LOANS- Multifamily - $ 400,000 minimum loan amount. ($500,000 minimum if referred by broker.) Multifamily buildings must be 10 units or more. NOTE Possibly can do Multifamily loan amounts as low as 250,000 ($300,000 if referred by broker.) but must have 25% down payment.
  • OTHER INVESTMENT PROPERTIES Office building loans, self storage units, mobile home park financing, strip centers, warehouses and other commercial real estate property loans - $300,000 minimum loan amount ($375,000 minimum if referred by broker).
  • RAW LAND LOANS OR LAND DEVELOPMENT LOANS $1,000,000 minimum loan amount.
  • SBA LOANS-$500,000 minimum loan amount. ($600,000 minimum if referred by broker).
  • OTHER SMALL BUSINESS LOANS (NON SBA)- $500,000 minimum loan amount ($600,000 minimum if referred by broker).
  • FACTORING AND ASSET BASED FINANCING These are business loans using accounts receivable, inventory, equipment & real estate as collateral- $1,000,000 minimum loan amount.
  • OTHER TYPES OF FINANCING NOT INCLUDED ABOVE - contact us for minimum loan amounts.
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