CAP rate for a fully rented property for ten years in a no risk market and best way to market to investors

In Selling Property - Asked by Frank G. - Nov 6, 2011
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Answer(s)

Gravis or Rhonda B.
Owner/Investor
Portland, TN

how to figure cap rate

Nov 7, 2011
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John M.
Broker/Agent
Ponte Vedra Beach, FL

The Cap Rate is the net operating income. You take the gross income and subtract the operating expenses (electric, maiantenance, whatever, etc.). You do not subtract mortgage payments, mortgage servicing, etc. Only subtract operating expenses. That is the Capitalization Rate.

Nov 7, 2011
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Karen S.
Broker/Agent
Kingston, NY

Determine income (rent roll), expenses (taxes, repairs, maintenance, etc.). Subtract expenses from income. This is your net operating income (NOI). Divide NOI by asking price. The result is cap rate.

Nov 8, 2011
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William F. K.
Appraiser
Bay Head, NJ

The net operating income is NOT THE CAPITALIZATION RATE! The capitalization rate is simply a property's net operating income (the income remaining after deducting expenses but before deducting the debt service) divided by the sale price or present value. It has an inverse relationship with the overall value of a property. When a cap rate is increased, the value of a property decreases and vice versa. The cap rate is also considered a risk rate of sorts. Riskier properties in poor locations or with multiple vacancies (for a multi tenant property) or with defferred maintenance issues would require a higher capitalization rate than a similar property without these issues.

Nov 27, 2011
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David B.
Owner/Investor
Woonsocket, RI

To determine an appropriate capitalization rate for an investment real estate asset (one which produces rental income) you must think of the asset in terms of investment return expectations. As risk to an investor increases, the capitalization rate increases, as the investor will demand a greater return on thier invested capital.
Consider, if you will, the least risky investments (US treasury bonds, CD's, saving accounts, etc..), and look at the return those investments pay. Then look at a real estate investment, and consider the risk components which translate into higher return expectations. Real estate is less liquid than T-bonds, cash in the bank, or short term CD's.
In order to establish a reasonable return expectation for your real estate asset, consider the market evidence established by recent sales of investment real estate assets which exhibit similar physical, locational, and economic charateristics to your asset. This exercise will help you establish a fair asking price for your asset based on reasonable market expectations for returns on invested capital.
As a guage of sorts look first at the best quality tenanted real estate asset sales (think walgreens, cvs, and major supermarket anchored retail assets which are encumbered by long term NNN leases to credit quality tenants), and adjust the capitalization rate of your asset by comparing it to those. Check some free reports (as the ones listed below) for some added insight into recent cap rate trends in net leased asset sales.

Dec 2, 2011
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