BY CHUCK WEST, CCIM AUTHOR AND EDITOR
Forever West MAY 2022 follow me on twitter @cwestucla
WHY RISING INTEREST RATES DEGRADE THE VALUE OF INCOME PROPERTY With inflation seemingly going higher by the minute the Federal reserve has belatedly started raising interest rates on interbank borrowing from zero to ¾% which reverberates through 10-year Treasury yields now over 3% and eventually to real estate loans now above 5%. Cap rates tend to follow interest rates but not directly. A cap rate is a valuation method used to evaluate income properties and is calculated by dividing a property’s annual net operating income (NOI) by its value. So for example a 6-plex that has an NOI of $36,800 and sold for $736,000 has a cap rate of 5%. In the past 10 years cap rates on many income properties were steadily dropping to 5% or even less in some expensive venues like California thereby increasing the value even with stagnant NOI. While cap rates assume free and clear properties (no debt) cash flow requires subtracting the annual debt service (mortgage Payments) from the NOI. When market cap rates exceed the debt service rate this is called positive leverage and allows an owner to typically make money not only on his own investment (down payment) but a return on the lenders mortgage (cap rate less mortgage rate). These days are over. Cap rates are rising nationally and now we are seeing some income property sitting on the market. That 6-plex we mentioned earlier will now likely not sell for less than a 6% cap rate or $613,000 assuming the NOI is constant. If a new buyer can get a mortgage for 6% this is called neutral leverage. Once mortgage rates exceed the cap rate you get a situation called negative leverage and negative cash flow. Most income property owners are facing expenses rising faster than income which creates a double value knock down with decreasing NOI and increasing cap rates and mortgage rates. Additional political risks exist in certain venues. CA just passed legislation that put a 5% cap on rental increases even on single family homes. This spells future trouble for that market.
WHY DO I NEED TITLE INSURANCE LEGAL WHEN A WARRANTY DEED IS CORNER GIVEN BY THE SELLER? Title Insurance can help ensure that title defects will not make a property un-saleable in the future because of: 1. Forged Documents 2. Undisclosed heirs to the property 3. Mistaken legal interpretations in wills 4. Misfiled documents at the county 5. Confusion due to similarities in names 6. Incorrect marital status 7. Mental incompetence of the grantor 8. Discrepancies in parcel boundaries (which may require a survey), covenants (that maybe violated by actual inspection of the property). The title company will show he recorded covenants but will not ensure that they have not been violated. This is the buyer’s duty. Maybe more practically speaking can you afford to sue the seller?
FEATURED PROPERTY
3151 NATIONWAY | CHEYENNE, WY Suite A1: Prime retail or office space for lease $7/sf +CAM only $1/sf/year. 8950 square feet.
Chuck West of #1 Properties was awarded the Certified Commercial Investment Member (CCIM) designation #897 in 1978 by the CCIM Institute, one of the leading commercial real estate associations in the world. More than 15,000 commercial real estate professionals have earned the CCIM designation requiring a rigorous combination of coursework and experience since the program was founded in 1969. Chuck is a licensed real estate attorney in CA since 1983 and broker in CA and WY, and has been involved in commercial real estate for over 30 years in private practice, as a corporate executive in charge of 10 million square feet of commercial properties on a national basis and as Director of Real Estate for two large counties handling 14 Million square feet of leased space and 50 million square feet of government owned space.
#1 Properties has closed 1,989 sales in 2021 YTD with a total volume of $731,733,166
05.12.22
“When the government fears the people, there is liberty. When the people fear the government, there is tyranny.” -Thomas Jefferson
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