Capitalization Rates Defined
A capitalization rate (“cap rate”, for short) is a commercial real estate tool widely used in the seniors housing market. Capitalization rates are used especially by those looking to purchase a healthcare property, and they should be easily calculated by the skilled nursing brokerage of your choice.
The Role of Cap Rates in Detecting Value & Risk
In order to calculate a cap rate, take the ratio between the net operating income (NOI) and the asset’s current value. Cap rates are always expressed in percentages.
In the income-approach valuation method, appraisers use capitalization rates to evaluate cash flows. Because this approach is the most common method for valuing performing assets, you must be extremely familiar with cap rates. Cap rates are also important to those who are considering listing their assisted living properties for sale, as calculating the appropriate cap rate is one of the initial steps in beginning the marketing process.
According to standard financial guidelines, the lower the return, the lower the risk and the higher the return, the higher the risk. Cap rates are representative of the anticipated amount of risk in a given asset. Most often, people are willing to pay a higher price for a safer buy. Therefore, congregate care facilities with lower cap rates for sale are seen as being less risky and more enticing. In today’s market, people can list their healthcare properties at higher prices.
Calculating Cap Rates
To accurately calculate a capitalization rate, use the net operating income and the current value of an asset. For this calculation, NOI is referred to as EBITDA – Earnings before Interest, Depreciation, Taxes (income taxes) and Amortization.
One common mistake when calculating the EBITDA of an asset is failing to add the 5% management fee and real estate taxes in the expenses. Management fees and real estate taxes must not be calculated in the NOI before using the number to calculate the cap rate.
In the past, assisted living facilities have had lower cap rates than skilled nursing facilities. This is because the majority of AL income is guided by free market and private pay, where skilled nursing facilities are mainly guided by government reimbursement. Though this information may be contested, the general marketplace considers assisted living facilities to be less of a risk than skilled nursing facilities.
Presently, assisted living and skilled nursing facilities have lower cap rates. AL assets’ cap rates have reduced from the traditional eight to ten percent down to six to eight percent. Skilled nursing assets’ cap rates are now at 10 to 11 percent from 12 to 14 percent in recent years.
The Stahler Group for Professional Assistance
Don’t let opportunities pass you by due to falsely calculated capitalization rates. The Stahler Group is a skilled nursing brokerage that is your best resource for designing the best deal for your portfolio and finding the right AL properties for sale. Our team members guide you through the process and help you determine accurate valuations of your asset, free of charge. Contact one of our specialists today.