Capitalization Rate to Cash for Keys

Capitalization Rate

The capitalization rate is a metric used in the real estate and investment property industry to analyze a property’s income-generating ability, as well as its potential market value. The capitalization rate focuses on the relationship between the property’s market value and its revenue. The final product of this calculation is a rate of return. Specifically, the capitalization rate consists of the net operating income (NOI) divided by the property’s fair market value or purchase price. For example, a commercial property with a net operating income of $80,000/year and a purchase price of $1 million would have a capitalization rate of 8.00%. Investors use the capitalization rate as a quick method for determining the suitability of a potential investment. If the “cap rate” is equal to the standard for similar properties in the area or region, the investor would probably be paying fair market value for the property. However, if the cap rate is lower than the norm, then the investor has to dig further into the data if he or she still wants to buy it: Permanently low. The low cap rate may indicate problems with the property or area that will keep the cap rate at a lower-than-desired level for the foreseeable future. Can the investor handle that? Potential. The low cap rate may be because of poor management and lack of resources on the part of the current owner. If that’s the case, the investor may be able to significantly (and quickly increase) the cap rate by making improvements to the property and the way it is maintained and managed. Leverage. The lower capitalization rate may give the investor the leverage he or she needs to negotiate for a lower purchase price. A lower purchase price would result in a higher cap rate.

Caravan

A caravan is a marketing tool used by some traditional real estate brokers and agents to sell the properties they have listed for sale. They may also include properties that they have not listed, but for which they can still receive commission by providing a buyer. The caravan is essentially a tour, during which a real estate agent or broker will conduct a group tour of homes and properties. Many caravans will include a van or minibus, so potential buyers don’t have to worry about driving and finding the listed property. In addition to efficiently showing a number of listed properties, caravans allow agents to generate more competition among potential buyers.

Carbon Monoxide

Carbon monoxide is a colorless and odorless gas that is produced when fuel is burned. It is a silent killer of hundreds of homeowners each year. Carbon monoxide is produced when furnaces, heaters, stoves or ovens are not properly burning fuel, or when garages, laundry rooms or fireplaces are improperly vented. All homes should have carbon monoxide detectors alongside smoke detectors, especially near boiler rooms and garages.

Carbon Monoxide Detector

A carbon monoxide detector signals an alarm (similar to a smoke detector) when carbon monoxide levels reach a minimum level. It is advisable for all residential properties, especially homes with fuel-burning appliances (stoves, fireplaces, furnaces, etc.) or attached garages to have carbon monoxide detectors.

Carpenter

A carpenter is a skilled contractor, builder or crafter who constructs or repairs with wood material. Note that modern carpenters do work with metal, especially as metal studs and beams are now used in increasingly more residential properties.

Carpenter Ant

A carpenter ant is a wood-damaging insect that sometimes infest wooden structures, creating a hazard for many homes. A carpenter ant infestation is normally evidenced by hollow, irregular chambers cut across the grain of partially decayed wood. Professional pest inspectors are trained to identify such infestation.

Carport

A carport is a covered driveway or parking space. They typically consist of posts and a roof. Although most carports have no walls, some garage-like structures may have up to three walls and still be considered a carport. Some people actually view a garage as a carport with four walls and a door.

Carry-Back

See the Seller Carry-Back entry.

Carrying Cost

Carrying costs are the expenses associated with holding a property until it is sold or able to generate sufficient revenue. This term is normally used by real estate speculators to calculate the feasibility of a potential investment. Speculative investors who lose money or barely break even on their investments often fail to properly anticipate their carrying costs. With each day, week or month that the investor holds on to a property, regardless of whether or not the investor is making any upgrades or improvements, that investor incurs carrying costs. The most common types of carrying costs include property taxes, hazard insurance, maintenance and management. However, carrying costs also include marketing costs, necessary repairs and interest charges on mortgage loans, as well as other expenses incurred by a speculator from the time an investment property is purchased to the time it is sold.

Carryover Provision

See Broker Protection Clause entry.

Carve-Out

With commercial property financing, especially with non-recourse loans, many lenders will carve out exemptions which will require the borrower to provide a personal guarantee to cover any potential default or lender losses. Fraud, malfeasance, negligence and environmental contamination are common examples of such carve outs.

Casement Window

A casement window is a type of window, in which the sashes are hinged on one vertical side and swings outward. Unlike double-hung and horizontal sliding windows, the screens and storm windows must be placed on the inside with a casement window. The biggest advantage of the casement window is that the entire window can be opened for greater ventilation.

Cash Basis

An accounting method that records expense and income amounts only when the entity actually disburses or receives the cash is called the cash basis. Compare with the Accrual Basis entry.

Cash Flow

The net amount of cash that an income property or business produces over a period of time is called the cash flow. This is the positive amount after deducting operating expenses. With mortgage applications, the property’s rental income stream can often be used to aid the applicant with the income qualification.

Cash Flow Analysis

A detailed review of an investment’s cash flow, the cash flow analysis examines the investment’s revenues and returns, versus its operating expenses. Contrast with the Discounted Cash Flow entry.

Cash For Keys

The “cash for keys” offer is a tactic used by some lenders and their real estate agents, in which they offer a cash reward for foreclosed borrowers to voluntary surrender their property. By offering to pay for the cost of the move-out or a small cash compensation, the lender will be able to save much more in loss time and additional eviction expenses. This tactic is only used after the foreclosure judgment has been issued. Along with the surrender of the property and keys, the lender may require the borrower to sign an agreement that waives all future rights of redemption.