Vail Daily column: Cap rate vs. appreciation investments
Ask a Realtor
Dear Joan,
I am looking for a real estate investment in your valley, and I have not decided the best way to go yet. I am considering a residential rental or maybe a commercial property. Do you have any local knowledge that I may not have thought of, as I sort through properties on the way to making my decision? I just want to make sure I end up with a sound investment here!
Dear Investor,
Let’s talk about what you consider a sound investment. Are you are looking purely to make money, or are you also buying for pleasure, with reasons such as using the property part-time for yourself or just having a possible tax write off for coming to the valley more often? Once you have decided your true goal(s) you will be able to take a better look at each opportunity.
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When I am advising my clients that are looking at making a real estate investment, I have them look at two factors: Capitalization rate (cap rate) and appreciation.
You have picked a good time to look for your investment because there are options in both residential and commercial in today’s market.
Let’s look at residential first. During the height of our previous pricing boom, there were very few residential properties that would have a positive cap rate (annual net operating income divided by the cost equals capitalization rate or the percentage you will make on your money). Meaning, that you could not charge enough rent, monthly or daily to defray your initial purchase price to make the residential property have a positive cash flow. At that time, almost all of the income you could hope for was appreciation as the value of the property increased, and that increase was substantial in many cases. However, in today’s market it is possible to actually find some rental residential properties that do have good cap rates.
As far as the appreciation for a residential property goes, we are starting to see appreciation become a positive factor again as prices slowly creep up. As a licensed real estate broker, we can never state that a property will increase in value we can only give you the comparable information during a period of time and let you draw your own conclusions. Ideally, you will find a property that will cash flow and be appreciating at the same time. On the other hand, if your main goal is to enjoy the property yourself and defray some costs and some expenses, the location and your personal preferences for your family’s wants and needs will probably be the deciding factors, not necessarily the potential income.
As far as commercial opportunities that have cash flow, these were hard to find during our economic down-turn but they are also starting to appear on the horizon now. Commercial store-front property can still be purchased at a good price and we have had some multifamily properties with good cap rates plus room for “sweat equity” improvements. We have also recently had some multifamily lots become available, as well as prime locations for commercial services on our I-70 corridor in our current market.
I would recommend that you find a knowledgeable real estate broker to represent you and have them make a thorough search of the market in your ideal price range. If you get an agent that has experience and a good working knowledge of the area you would like to be in, then they may know of opportunities that will be coming available soon and can let you be one of the first to see a new listing as it hits the market. The wonderful part of Eagle County is that there are so many great choices! Best of luck to you!
Joan Harned is an owner and broker for Keller Williams Mountain Properties and heads up Team Black Bear, her own real estate team. Harned has been selling real estate in Eagle County for 27 years, is a past chairman of the Vail Board of Realtors, past Realtor of the Year, past director on the Great Outdoors Colorado Board and a member of the Luxury and Land Institutes. Contact Harned with your real estate questions at joan@teamblackbear.com, 970-337-7777 or http://www.skiandteehomes.com.
