What is the easiest way to calculate cap rates?

Are there different formulas for residentual vs. commercial?
In General Area - Asked by Mark H. - Apr 14, 2009
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Answer(s)

Paul S.
Broker/Agent
Glendora, CA

Cap rate is merely the relationship of the sales price or value to the income stream it produces. The calculation for residential or commercial is the same. Since commercial usually has greater risk it generally carries a higher cap rate over residential. The formula is: Net Operating Income (NOI)/ Price= Cap (%). Cap does not include debt service. In other words you calculate cap as if you paid cash.
Caps will vary because of a lot of factors. An area in real high demand and low supply will have a lower cap. Why? Because prices will be higher relative to the rents. A low cap translates to a high price.
Caps in California have been very low compared to the Midwest. Now that prices are falling in California the caps are rising. Keep in mind a cap rate only looks at a 1 year period and does not include any debt. A more complete measure is internal rate of return (IRR) which does take into consideration multiple years of cash flow, debt and residual value.
If you need more information contact me at paulsylvester@remax.net or 626 485-5163.
Paul Sylvester, CCIM

Apr 14, 2009
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Devin G.
Broker/Agent
Laguna Beach, CA

CAP is a very basic calculation and is dependent on accurate opinions of CURRENT value as well as an accurate NOI. From that, the formula, as stated, is CAP=NOI/Value and can be worked backward for each individual component of the equation.
As far as different for residential and commercial, nope, its the same -

Apr 15, 2009
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David M.
Westmount, QC

NOI/PRICE. Pure and simple

Apr 21, 2009
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