Reference no: EM133049085

Investment Profitability Discussion: California Real Estate

One of the toughest assignments in real estate is calculating values based on a capitalization (cap) rate. Dividing by decimals is just something you never learned in school. We learned addition before subtraction, and multiplication before division, which is why we are better at addition and multiplication than we are with subtraction and division. By the time we got to decimals, well, we did not...if your teachers were anything like mine, they taught us something useless like fractions instead of decimals.

But think about it this way, if a property sold for $100,000 and you earned 6%, then you made a $6,000 commission (you just multiplied $100,000 by .06 in your head and did not even know it. So if you wanted a 6% return on an income of $6,000, you would have to pay $100,000 for a property (same equation, but now you have to divide $6,000 by .06!).

So, let's say you have found a property with a Net Operating Income (NOI) of $35,000, and you would like a 4% return; how much are you willing to pay for it? Give me your answer, and share with the class some of the frustrations you are having dividing by decimals.