"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 property and 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."
May 9, 2017