how do i find cap rates for a specific zip codes/city.

should i simply search for properties in the zip code and rely on the asking cap rates by the seller, is that reliable information
In Buying Property - Asked by Saikiran Y. - May 31, 2011
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creative g.
Phoenix, AZ

Explanation of CAP RATE
The Capitalization Rate or Cap Rate is a ratio used to estimate the value of income producing properties. Put simply, the cap rate is the net operating income divided by the sales price or value of a property expressed as a percentage. Investors, lenders and appraisers use the cap rate to estimate the purchase price for different types of income producing properties. A market cap rate is determined by evaluating the financial data of similar properties which have recently sold in a specific market. It provides a more reliable estimate of value than a market Gross Rent Multiplier since the cap rate calculation utilizes more of a property's financial detail. The GRM calculation only considers a property's selling price and gross rents. The Cap Rate calculation incorporates a property's selling price, gross rents, non rental income, vacancy amount and operating expenses thus providing a more reliable estimate of value.
If we have a seller and an interested buyer for particular piece of income property, the seller is trying to get the highest price for the property or sell at the lowest cap rate possible. The buyer is trying to purchase the property at the lowest price possible which translates into a higher cap rate. The lower the selling price the higher the cap rate. The higher the selling price, the lower the cap rate. In summary, from an investor's or buyer's perspective, the higher the cap rate, the better.
Investors expect a larger return when investing in high risk income properties. The Cap rate may vary in different areas of a city for many reasons such as desirability of location, level of crime and general condition of an area. You would expect lower capitalization rates in newer or more desirable areas of a city and higher cap rates in less desirable areas to compensate for the added risk. In a real estate market where net operating incomes are increasing and cap rates are declining over time for a given type of investment property such as office buildings, values will be generally increasing. If net operating incomes are decreasing and capitalization rates are increasing over time in a given market place, property values will be declining.
If you would like to find out what the cap rate is for a particular type of property in a given market place, check with an appraiser or lender in that area. Be aware that the frequency of sales for commercial income properties in a given market place may be low and reliable capitalization rate data may not be available. If you are able to obtain a market cap rate from an appraiser or lender for the type of property you are evaluating, check to see if the cap rate value was determined with recent sales of comparable properties or if it was constructed. When adequate financial data is unavailable, appraisers may construct a cap rate through analysis of its component parts thus reducing the credibility of the results. Cap rates which are determined by evaluating the recent actions of buyers and sellers in a particular market place will produce the best market value estimate for a property.
If you are able to obtain a market cap rate, you can then use this information to estimate what similar income properties should sell for. This will help you to gauge whether or not the asking price for a particular piece of property is over or under priced.

Cap Rate = ------------------ Estimated Market Value = --------------
Market Value Cap Rate

Example 1: A property has a NOI of $126,000 and the asking price is $1,200,000.

Cap Rate = -------------- X 100 = 10.5

Example 2: A property has a NOI of $120,000 and Cap Rates in the area for this type of
property average about 10.

Estimated Market Value = -------------- = $1,200,000

Net operating income is determined by subtracting vacancy amount and operating expenses from a property's gross income. Operating expenses include the following items: advertising, insurance, maintenance, property taxes, property management, repairs, supplies, utilities, etc.
In short ask a Real Estate Appraiser for comps (Recently comparable properties) in your area.

May 31, 2011
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Rob B.
Chandler, AZ

There are two guides for this.
1. What are alternative forms of cash investment going to provide in security and return?
2. What are the general market cap rates in a study area?
There are always other significant factors that affect the capitalization rate of return in real estate.

1. What is the demand for a particular property?
2. What is the ownership form, fee or leased? If leased what is the term and conditions of the lease?
3. What is the condition of the property?
4. What is the competitive location of the property?
5. What is the current income and will the market allow increases?
6. What are the current expenses on the property and would different or improved management have an increased or decreased effect on the expenses?
7. What makes the market area, superior or inferior in doing achieving rental rates, compared to other areas?
After reviewing these factors it is up to you to study the actual NOI being achieved for a property and measuring those rates against both offered and recently sold properties in a prescribed area.
It's amazing, but if you put the work in, you can actually determine a proper capitalization of net income rate.
Onward and upward …

May 31, 2011
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Rick L.
Doral, FL

Saikiran, the value of a income property is its NOI divided by the cap rate. I would look up Sales Comps in a paricular zip code, check the financials, if given, to link the NOI and equate the cap rate. As a rule of thumb cap rates at present are 7% to 9%.

May 31, 2011
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Rick L.
Doral, FL


May 31, 2011
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Jeremy C.
Andover, MA

If you're looking for specific cap rates for a city you're investing in, check out this cap rate report. It tells you not only how to formulate cap rates, but also about resources such as where cap rates indices are published.

Jun 2, 2011
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