To determine an appropriate capitalization rate for an investment real estate asset (one which produces rental income) you must think of the asset in terms of investment return expectations. As risk to an investor increases, the capitalization rate increases, as the investor will demand a greater return on thier invested capital.
Consider, if you will, the least risky investments (US treasury bonds, CD's, saving accounts, etc..), and look at the return those investments pay. Then look at a real estate investment, and consider the risk components which translate into higher return expectations. Real estate is less liquid than T-bonds, cash in the bank, or short term CD's.
In order to establish a reasonable return expectation for your real estate asset, consider the market evidence established by recent sales of investment real estate assets which exhibit similar physical, locational, and economic charateristics to your asset. This exercise will help you establish a fair asking price for your asset based on reasonable market expectations for returns on invested capital.
As a guage of sorts look first at the best quality tenanted real estate asset sales (think walgreens, cvs, and major supermarket anchored retail assets which are encumbered by long term NNN leases to credit quality tenants), and adjust the capitalization rate of your asset by comparing it to those. Check some free reports (as the ones listed below) for some added insight into recent cap rate trends in net leased asset sales.
Dec 2, 2011