How measure a cap rate

In Selling Property - Asked by Diana M. - Mar 25, 2017
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Answer(s)

Robert H.
Broker/Agent
Metairie, LA

You determine value for commercial real estate by dividing the Net Operating Income by The Cap Rate. The Cap Rate varies by region and by category of real estate. I've published a few articles on how to value commercial property. Here is one:
http://www.louisianacommercialrealty.com/2015/05/how-to-value-commercial-real-estate/ and another:
http://www.louisianacommercialrealty.com/2016/07/caprate/

Mar 25, 2017
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Peter Z.
Broker/Agent
Huntington, NY

It is hard to determine the exact "market" cap rate for a given property type in a given area because quite frankly it is very difficult to get accurate information for the actual net operating income of a given property. It is often not as advertised. The best way to determine the going cap rate is to contact a few local commercial lenders to find out the cap rate THEY determined for recent sales of similar properties. They are the most likely parties to have based it upon ACCURATE NOI info.

Mar 26, 2017
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Juanita A.
Broker/Agent
Hallandale, FL

A capitalization rate is a quick estimate of the return an investment would give you based on the income it produces and the price you pay for it, at a specific point in time. So, to find the cap rate for a commercial real estate asset, you divide the net operating income (what the building could potentially produce, minus estimated vacancy, plus other income, minus expenses not including loan and investor's tax) by the sales price. If you want to use a market capitalization rate (what other investors are getting for a similar asset in the same or a comparable market) to know how much you should pay for the asset, then you could ask brokers or lenders, and browse listed properties with advertised cap rates. Usually, they are advertised above actual market rates, but you can use an average. Cap rates are very subjective and only give you a general idea of value AT A SPECIFIC POINT IN TIME. For a more accurate, personalized analysis, you should use the net present value of the cash flows. This means you would project income and expenses based on market data, project the time you would own it and the price you could sell for, discount the cash flows at the rate you expect from your investment and find the price you should pay to stay at that required return.

Mar 27, 2017
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Pouria .
Broker/Agent
La Jolla, CA

Calculate the yearly gross income of the investment property. The gross income of a piece of investment property will mainly be in terms of rent rolls. ...
Subtract the operating expenses associated with the property from the gross income. ...
Divide the net income by the property's purchase price.

Apr 8, 2017
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