Most commercial brokers, including myself, use IRR, CAP Rates, FMRR and other tools as a way of comparing commercial investments. However, given the current market conditions, other factors such as cost per foot, redevelopment costs, local market conditions and financing alternatives need to be given consideration. I have attached 2 links for you to view. If you have Excell on your computer the formulas and instructions are included.
Remember, these are only tools for comparison. I have seen projects sell at a 4% CAP Rate in a down market to a buyer who can hold for a long period on the belief that the market will come back over time. I have also had clients from foreign counties purchase very low CAP rate properties because of their belief that USA real estate is a better alternative to other investments they could make (bonds, stocks, investing in their own countries).
Phil Bonham CA DRE #804772. ICON Asset Group.
Feb 16, 2011