How do you figure cap rate

I have 10 units, residential rental property, going to sell but how do I figure cap?
In Selling Property - Asked by Linda N. - Nov 15, 2015
Report Abuse
Answer this Question

Answer(s)

William R. H.
Owner/Investor
Corona Del Mar, CA

Quick answer is Net Income/Price = Cap Rate. Net income is a more complex problem as it is sometimes based on next year's projection and sometimes based on last year's actual and may, or may not, include reserves for replacement. For apartments, Gross Income less vacancy = Effective Gross Income (or actual income received). Effective Gross Income less Total Operating Expenses = Net Operating Income. Operating Expenses typically include RE taxes + insurance + management + maintenance & repair. Operating Expenses exclude mortgage interest and depreciation. Good Luck!

Nov 15, 2015
Report Abuse
Brian B.
Broker/Agent
Tampa, FL

Cap rates are dependent on the situation with the property and the market. I would reach out to a local broker that knows your type of product and ask them for guidance.

Nov 17, 2015
Report Abuse
Randy K.
Broker/Agent
Fort Myers, FL

The CAP rate is a mathematical equation. It is one indicator of price. It is a rule of thumb along with others i.e. Internal Rate of Return and Cash on Cash and Gross Rent Multiplier. The answer by Brian B. suggests that it is a moving number but that is not true. The rate that someone is willing to pay changes but the rate is a definte equation with one unique answer. But, if the Capitalization Rate {CAP Rate) is low then the price to the seller is higher than what a higher CAP Rate would bring. Example: If NOI is $100,000 and the CAP Rate is 5.1 then the property is worth $1,960,784. If the same NOI of $100,000 is sold at a 9.2 CAP then the property is worth $1,098,901. It is a ratio only.

Nov 17, 2015
Report Abuse
Timothy C.
Broker/Agent
Chesapeake, VA

Use the CCIM model...always figure Cap rate for pricing based on the buyer's first year expected rate of return of NOI. That's Net Operating Income. Period. That's how pricing is done on an investment property.

Nov 17, 2015
Report Abuse
John T.
Broker/Agent
Philadelphia, PA

The answers by William H and Randy K are technically correct if the task is to calculate cap rate if you have the NOI and price as given. However I believe Linda N is asking how to price her asset, which involves determining the correct cap rate to apply to her NOI. Here is the method:
1. Collect a representative sample of sold comparables
2. Research the NOI for each comp
3. Calculate cap rate for the comp: cap rate = NOI / sold price
4. Average the cap rates from the comps to determine what the market is paying
5. Apply this average cap rate to your NOI to arrive at price

Dec 2, 2015
Report Abuse
Drew R.
Owner/Investor
Austin, TX

A cap rate is simply the buyer's expected initial un-leveraged annual yield. It is equal to Net Operating Income (NOI) divided by purchase price. For example, if the NOI is $100,000 and the purchase price is $1,500,000, then the "going-in" cap rate is 6.67%.

Nov 1, 2016
Report Abuse

Welcome to Answers

LoopNet Answers is where the commercial real estate community shares what they know to help each other out. And it's all for free.

Ask a question to get advice from brokers, investors, professionals and local experts.

Answer questions to raise your visibility as a trusted advisor and build new relationships.

Ask a Question

Post Question