Wednesday, November 30, 2011

King-Kong Cap Rate

The Property Report in today’s Journal features the “King Kong,” Empire State building. The disclosed facts are that the building was appraised this summer at $1.65 billion, and secondly, that the net annual income is $63 million.

$63 million of revenue, relative to a property valued at $1.65B is a yield dancing around 3.82%. Not exactly the best way to define the ‘cap rate,’ because “net income” implies that interest deductions and various credits are netted out, but close enough! 

3.82%… (Yawn). Unless you don’t travel or eat food… this will barely outpace inflation.

However, this figure is actually within range of an edifice to most major metros: it is acknowledged that cap rates of 2-3% are really ‘the norm’.

But what does this mean for you? Sub-districts and managed personal-properties can find yields in the vicinity of 8-10%, and even higher if managed the right way! Sure, people most often anchor themselves to the nominal figure…$x-dollars…but a yield is the most objective, apples-to-apples comparison people can make when evaluating an actual investment. So, focus on the yield of an investment when determining its capital investment worthiness.