Enter your question here.please explain CAP rate. The higher the number the better the buy?

In Buying Property - Asked by Tony B. - May 27, 2013
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Answer(s)

Taylor P.
Broker/Agent
Austin, TX

Cap Rate is the NOI, or "net operating income", divided by the value of the property. The higher the cap rate the better a deal it is, that is correct.

May 28, 2013
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JJ B.
Researcher
Denton, TX

CAP Rate is 1 Criteria for evaluating the property....
Take 2 Cases
1. 1000 Sq Ft Building for $100,000 with NOI of $8,000, 5 year lease......Cap Rate is 8%
2. 1000 Sq Ft Building for $300,000 with NOI of $30,000, 5 year lease....Cap Rate is 10%
Would you pay 5 times the /SqFootage Rate for a extra 2% Cap Rate for only 5 years. I might if it is a minimum of 10+ year left on lease and solid tenant.
A seller ( especially already leased or owner leased ) could show good Cap Rate to try to sell at high price.

May 28, 2013
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JJ B.
Researcher
Denton, TX

Correction.......Read ....."3 times" instead of "5 times"

May 28, 2013
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Jose S.
Broker/Agent
San Antonio, TX

The higher the cap rate the better the deal is for the buyer. The lower the cap rate the deal is better for the seller.

May 29, 2013
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John C.
Broker/Agent
Orinda, CA

Fixed expenses not including mortgage. Mostly estimates for expenses. The lower they are "estimated" by listing agent or seller the higher the cap rate.

May 30, 2013
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Financial C.
Lender/Mortgage Broker
Los Angeles, CA

not necessarily. Higher yield is typically higher risk and higher reward. If you can find a low risk deal at a high cap rate then I agree with your thought. But typically the market is fairly rationale and if the cap rate is higher its a riskier deal than one with a lower cap rate. Good luck

Jun 1, 2013
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Timothy C.
Broker/Agent
Chesapeake, VA

CAP Rate is the expected first year return. It is the net operating income divided by the price. It does not include debt services or income taxes. The higher the number, the higher the expected return. However, it does not mean it is a better return. Cap rates are increased to adjust for risk, condition of property, etc. Also, keep in mind that cap rate is just an entry level number. An investor should do a full discounted cash flow analysis and IRR over the holding period, accounting for risk tolerance, expected rate of return, and taxation.

Jun 14, 2013
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James J.
Lender/Mortgage Broker
Portland, OR

The face cap rate on a sale is potentially meaningless. Get your own broker to negotiate with the listing broker as there is too much involved in this question to give a meaningful response. Generally a higher cap rate indicates a higher rate of return on the investment. But it does not consider if there are additional expenses like deferred maintenance. Also, are reserves deducted as an expense. Too many questions for this seemingly simple question.

Jun 21, 2013
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Gregory G.
Broker/Agent
San Francisco, CA

The higher the CAP the higher the price in relation to income.

Sep 9, 2013
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