Let’s talk about cash flow versus cap rate.
Bob Nelson, Eugene real estate investment broker
Bob Nelson: Let me clarify a couple of items. We use terms on our radio show. Marcia and I use the term cash flow, cap rate. Let’s clarify the concept of cash flow. Cash flow is pretty easy to understand. I own a property, it generates a certain amount of income, it generates a certain amount of operating expenses. What’s left at the end of the year, if I took nothing out of it would be cash flow. Now that’s, of course, if I owned it free and clear of debt, and I didn’t have to pay any income tax and so forth. It’s interesting because we measure cash flow relative to the equity that we have in the property. That portion of value minus debt equals equity. The higher the cash flow, the more productive that asset is considered to be.
Bob Nelson: In fact, if I owned 10 things and I did an analysis, and I was nearing retirement, I would probably focus on the ones that produced the greatest amount of stable, enduring cash flow. I would probably consider selling, if I needed to sell something, selling the one that had the least amount of cash flow. Now at the same time, if I owned the property free and clear of debt, that’s if. The amount of cashflow, the amount of annual cash flow divided by the value of the property would be its cap rate or capitalization rate. The capitalization rate is that a thing that I would gauge property A versus B versus C, all of them having comparable locations as to quality of location. The higher the cap rate, the more productive the property.
Bob Nelson: Now certainly, that and for several things, that you’re managing the property well, that you’re being attentive to the amount of income the property is capable of producing, and that you’re optimizing that amount of income as you can. We have rent control in the state of Oregon, but this last year we were able to go with a 10.1% allowed increase in rent. That is, of course, if the tenancy would allow that. If you increase your rent and everybody moves out, that’s not a good idea.
Join Eugene, Oregon, real estate experts: Bob Nelson, Real Estate Investment Broker with Pacwest Real Estate Investments, and Marcia Edwards, Residential Real Estate Broker with Windermere Real Estate, daily at 5:30pm on KPNW for the “Real Estate Today” radio show.