Capitalization Rate Tag Archive

Jump to:
What is Capitalization Rate (Cap Rate)?
How is a cap rate calculated?
Is it better to have a high or a low cap rate?

What is Capitalization Rate (Cap Rate)?

Capitalization Rates (Cap Rates) offer a way to measure the levels of risk that investing in a certain property may bring to any interested parties.

How is a cap rate calculated?

To find out what the cap rate for a building is, the net operating income (NOI)–that is, the annual revenue a property yields minus its operating costs–is divided by the market value or sale price of the property.
For example, if we have an office building with a current market value of $13,000,000, and a NOI of $1,170,000, the cap rate would be 9%.

Is it better to have a high or a low cap rate?

Investors/buyers generally look for higher cap rates, since that usually means they acquired the property for a lower sale price and that the investment will start paying for itself soon. On the flip side, these properties come with higher risk levels.

Landlords/sellers are pushing for lower cap rates because they show the property succeeded in getting a higher sale price. These buildings present lower risk levels, but sometimes the low cap rate might also signal low demand within the market.

For commercial real estate properties, a cap rate of 4-10% per year is considered a reasonable range for investors. However, when trying to establish whether a cap rate is high or low in a specific situation, there are several things one must bear in mind:
– The property type (residential buildings present lower risk levels, so they tend to have lower cap rates, followed by office, industrial, retail, hotel properties)
– Market type (primary, secondary, tertiary) and conditions
– Tenant quality
– Lease expiration date.

You might also be interested in:

What is eviction?
What is fiduciary?
What is financing/mortgage contingency?

Search other terms

A
B
C
D

E
F
G
H

I
J
K
L

M
N
O
P

Q
R
S
T

U
V
W
X

Y
Z

Popular terms

Amortization

Equity

Notary Public

Progression/Regression

Acquisition

Annuity

Asset

Fiduciary

Inflation

Contingency

Escrow

Power of attorney

Real Estate Agent

Eminent Domain

Liability

Statute of Limitations

Valid

Variance

Contiguous

Deficit

hutterstock_669983044_property_investment

Written by

15 Commercial Real Estate Terms You Should Know

Commercial Real Estate News, Finance, Resources| Views: 0

There’s no escaping it. Every industry is filled with jargon and commercial real estate is no exception. Whether you’re an aspiring real estate agent or just curious about the...

Read More

Written by

How to Calculate and Use a Cap Rate

Commercial Real Estate News, Deals, Finance, Office, Resources| Views: 9

A capitalization rate is one of the most common calculations used in evaluating investment real estate. It’s also one of the most misunderstood and misused metrics in...

Read More