Cap Rate Recommendations - National Income Property Index (NIPI)

Current Index Ratings for Capitalization Rates

November 2008

Current Employment State of the Economy Current Recommended Negative/Positive Spread Current Recommended Capitalization Rate Range Current Recommended Capitalization Rate
Mild Recession Medium Positive 7% - 7.5% 7%

Cap Rate Recommendations NIPI™ DATELINE: November 11: The United States continues its predictable and inevitable slide into a recession. For more information on market cycles, please reference NetGain’s essay “Market Cycles and Income-Producing Real Estate.”

Highlights of the current U.S. economy:

  • The unemployment rate for October increased to 6.5% from the prior 6.1% rate for September (see NIPI unemployment chart below)
  • The Consumer Confidence Index for October is 38 (1985=100), a record low
  • The Commerce Department reported that the gross domestic product (GDP) fell at an annual rate of 0.3 percent in the July-September period, a significant slowdown after growth of 2.8 percent in the prior quarter.

Where does the economy go from here? For informed analysis and answers, refer to tomorrow’s essay “America’s Current Economic Downturn, The Solution, Future Income Property Investment Opportunities.”

NIPI capitalization rate recommendation: Income property buyers should consider capitalization rates of 7% minimum. Included in determining the capitalization rate should be an attentive lease rollover analysis. The probabilities are that releasing lessees will be executed at lower rates.

Consequently, all income from leases that expire within one year has to be re-evaluated when determining the net operating income to compute a capitalization rate. The collected income from those leases has to be adjusted to what the probable income would be. Remember, the lease that offers the option to renew at a previously negotiated rate is a unilateral agreement (at the discretion of the lessee). If market rates are higher, the lessee will execute. If market rates are lower (as is the case in most instances), the lessee will not execute the option, but will re-negotiate to get the lower market rate.

The National Income Property Index™ (NIPI™) is the preeminent income property guide for increasing ROI and minimizing investment risk by determining effective cap rates. NIPI™ provides investors with time-proven recommendations based on the two most crucial influences affecting the value of income property: jobs and the cost of debt service. Based on monthly National Employment figures, NIPI™ provides recommendations on the most advantageous positive spread to negotiate when purchasing income property. It also calculates the current cost of debt service and recommends the best cap rate range that responds to the recommended positive spread based on up-to-date nationwide data.

Supporting Documentation for Recommended Cap Rates

Historical Employment and Interest Rate Data

Cap rate recommendation data continued on next page…



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