Brokerage Reminder: Know the bottom line for investment properties
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Updated 08-24-2012
Investors are crowding into the buyer’s market today and they all want to know the same thing: “Is this property going to pay off?”
Any agent can answer this question with two simple formulas:
- the capitalization rate (cap rate); and
- the net income multiplier (NIM).
The cap rate is pure profit — the amount of money remaining after all of the owner’s property expenses are deducted from the gross income produced by the property — expressed as a rate, or percentage. Most real estate investors will have a specific cap rate in mind when shopping for income-producing property. This rate may be realistic or not, depending on the current market.
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About The Author
Fernando Nunez
is first tuesday's in-house Broker Consultant. Fernando has over 20 years' experience in California real estate, including the single family residence sales, mortgage loan origination, investment properties and commercial leasing. Fernando assists the editorial staff with real estate writings and writes first tuesday's weekly Brokerage Reminder series.
EXTREMELY HELPFUL! THANK YOU!
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I assume the NIM is the net interest margin (NIM)
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Thanks. This was helpful. FYI: NIM is Net Income Multiplier. Try searching “NIM and Cap Rate” for further info.
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In order to make the sale most sellers and their brokers minimize the expenses and exaggerate the income and seldom include management as an expense. An allowance for vacancy is rarely seen. Buyer inquiries about reserves for replacements are answered in silence or jibberish. There are very few properties that will cash-flow in California, especially if they are encumbered by a mortgage. Finding something that will break even is often considered a great success. Realistic cap rates are hard to come by. I’m not talking about cap rates taken fromthe market. So, who buys these types of properties… someone who is very stupid or who has very deep pockets? I’m talking at least 30 years of negative cash-flow deep.
To Phillip…. don’t worry about it. NIM is net income multiplier. What is a net income margin anyway? Good one!!
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NIM is determined by 1 divided by the cap rate, not 100.
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You are correct.
The cap rate is a percentage, not a whole number. Thus, the reciprocal of the cap rate is found by dividing 1 by the cap rate.
For example, if the cap rate for a property is 8%, an agent may write the rate as 0.08 and divide 1 by 0.08 to find the NIM: 1 ÷ 0.08 = 12.5.
The same can be accomplished by simply writing the 8% cap rate as a fraction (8/100) and inverting it: 100/8 = 12.5.
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