Quite a story – my first real estate appointment in Arizona. Julian Rawls. $89,900. 82nd Street, just south of Chaparral. Success or failure?
1981. We had just moved from Cincinnati a few weeks before. I didn’t have a clue how to get around this town and knew nothing about the local real estate market.
I needed to get something going . . . quickly. I know it seems hard to imagine now, but back then we barely had enough $$ to exist 2-3 months (and only if we lived really tight).
I knew that even if I made my first sale right away, it would likely take at least a month, probably longer, to close the deal and get paid the commission. If the sale fell through, I would be in serious trouble (you too my sons). There was no time to waste. I was motivated, to say the least. READ MORE
Life lessons from Chubby (my dad) and other smart folks I’ve met on the road.
“Cap rate?” I asked. “What the heck is that?”
Chubby laughed. “Greg, it stands for capitalization rate. It’s a way to value rental real estate.”
“But Dad,” I said. “You once told me real estate values were determined by comparing sales of similar properties.”
“That’s true with homes,” Dad answered. “But with apartment buildings, office buildings, and other income producing properties, cap rate is more commonly used.”
“Can you explain?” I asked.
“Greg, suppose you are choosing between an older apartment building in a high-crime area or a newer building in a nicer area. You would certainly want a higher return on your investment as an incentive to buy the older building. That means the price would have to be lower or the rent higher.”
Dad could see the perplexed look on my face. He continued,
“Presume that each building generated the same $20,000 a year in rental income. You might be willing to pay $200,000 (10% return) for the newer building but only $100,000 (20% return) for the older building. Those percentages are cap rates – the return you demand based on the desirability and risk associated with the property. As you can see, when the cap rate goes up, the property value goes down.”
What did I learn from Chubby that day?
Capitalization rate is the percentage return buyers expect based on the desirability of the investment…. a lower return on nicer properties, a higher return on less desirable properties.
To determine the value of a property, divide this percentage (i.e.10%) into the annual net rent of the building (i.e. $20,000) to arrive at market value (i.e. $200,000).
It’s painful to recall that icy-cold night when Mimi so hopelessly cried. And, a father who acted so badly.
It was the winter of ’63. I was 15. Chubby asked if I’d like to sit in on one of his new agent real estate training sessions. He held them three nights a week in the conference room at the office.
What “boss’s son” wouldn’t? This would be totally fun. Soon I would learn, actually not.
Every new agent attended. A doctor’s note was your only excuse.
A young cowboy…
Chubby started the evening by calling on a sweet, middle aged, soft spoken lady named Mimi. He asked her to stand. “Mimi,” he said, “Give us the definition of real estate.” She did. It was totally right, just not word-for-word perfect, what I came to call “Chubby-Right.” READ MORE