The What and Why of Capitalization Rates

Capitalization rates, or cap rates, are a valuation tool used in the senior housing market and commercial real estate in general. They become an important number to those searching to buy healthcare properties and one that your preferred skilled nursing brokerage should be able to calculate without error.

Cap Rates are Important
in Determining Value and Risk

Capitalization rates are expressed in percentages and are a ratio between the net operating income (NOI) and the current value of an asset.

It is important to understand cap rates because appraisers use them for valuing cash flows in the income approach valuation method. The income approach is the most common method of valuing performing assets. If you are an individual considering listing your assisted living properties for sale, knowing the appropriate cap rate for your facility is a fundamental starting point in tailoring your marketing approach for those searching to buy assisted living facilities.

Cap rates represent the perceived amount of risk in any given asset. Standard finance rules state that the lower the return, the lower the risk and the higher the return, the higher the risk. People are willing to pay more for a safer buy, meaning congregate care facilities for sale with lower cap rates are perceived as having less risk and more desirable. As a seller in today’s market, this means you can list your healthcare properties at a higher price.

Calculating the Correct Cap Rate

Cap rates are calculated using the net operating income and current value of an asset. NOI for the purpose of this calculation is referred to by the acronym EBIDTA, which stands for Earnings before Interest, Depreciation, Taxes (income taxes) and Amortization.

A common mistake people make when calculating the EBITDA of their assets is failing to include a 5% management fee and real estate taxes in the expenses. For an accurate valuation, management fees and real estate taxes must be deducted from the NOI before using that number in the cap rate calculation.

Assisted living facilities have historically had lower cap rates than skilled nursing facilities because the majority of assisted living income is driven by free market and private pay whereas skilled nursing facilities are primarily driven by government reimbursement. Many may argue this, but the general market place views assisted living as having less risk potential than skilled nursing facilities.

Today, assisted living properties for sale and SNFs for sale have lower capitalization rates than recent years. Assisted living assets have dropped from the traditional eight to ten percent down to six to eight percent. Skilled nursing assets are down to 10 and 11 percent from 12 to 14 percent in past years.

The JCH Group for Professional Assistance

When capitalization rates are improperly calculated, opportunities pass by. It is a crucial number to know for your healthcare properties.

The JCH Group is a skilled nursing brokerage dedicated to designing the best deal possible for your growing portfolio. We are your best resource to find the right assisted living properties for sale.

At the JCH Group, our team members walk you through the process and provide an accurate valuation of your asset free of charge. Contact one of our specialists today.

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