cap rate formulas

calculating the cap rate for a commercial property?
In Selling Property - Asked by Mike T. - Oct 8, 2010
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Joe L.
Dallas, TX

CAP rate is NOI divided by price. NOI is Income minus expenses. Income includes scheduled gross income minus vacancy and collection losses. Expenses are hard expenses (fixed and variable) such as utilities, taxes, insurance and management. For NOI calculations, do not consider interest expense, note payments, or depreciation.

Oct 8, 2010
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Linda D.
Addison, IL

Unfortunately, in today's climate, the cap rate is established by the market trends and by what has sold in a particular area. There are published reports giving that information that the appraiser uses in determining what that cap rate will be. This is a big factor in determining value. For example, income and expenses on a property may not have changed in the last few years but because the cap rate has increased, the value of a property has been reduced. In using the formula NOI divided by cap rate = Value, you can see that there would be a huge difference in the value depending on whether the cap rate was 6% or 9%. This will be a problem for commercial owners wishing to refinance their 5 year balloon loans over the next few years.

Nov 16, 2010
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