As many of you know, David Letterman presents a nightly top-10 list on his show. I’m always a bit in the dark when Dave does his countdown because I’m so uninformed about pop culture. It occurred to me some people might feel the same way about real estate terminology, and it might be helpful to readers to have a top-10 list of common terms.
Many self-storage owners and buyers may be unfamiliar with the language real estate professionals use frequently throughout the process of buying and selling properties. Brokers sometimes forget to explain the terms they use on a daily basis. Below you’ll find a list of frequently used phrases to help you understand the lingo of real estate transactions. Learn them, and you might even impress a broker or two. Drum roll, please!
10. Cap Rate
The cap rate is the rate of return an investor is willing to accept on an income-producing real estate asset. Because different types and classes of investments can be difficult to compare, a cap rate provides a basis for evaluating the rates of return of unique properties.
Many factors play into the cap rate, most especially interest rate. Some of the other factors are a property’s location, market conditions, quality of construction and historical income, just to name a few.
You can calculate the cap rate by dividing the net operating income (see No. 9) by the purchase price. Or, to calculate a purchase price or value for a facility, you can divide the net operating income rate by the return an investor is seeking.
There are other methods of arriving at a value, such as replacement cost and surveying the market, but cap rates are the gold standard for valuing self-storage. The cap rate is largely a function of the general real estate market and somewhat dependent on the qualities of the facility.