BY Justin Mitchell, Adam Lawrence, Megan Johal & Sam Taktsang
Cap rate is a widely-used metric to assess the value of a commercial property. But what exactly is cap rate, and why is it so important in commercial real estate?
First, let’s define what cap rate is. Cap rate is short for “capitalization rate.” It’s a metric that measures the rate of return on a commercial real estate investment. It’s calculated by dividing the net operating income (NOI) of a property by its current market value. The resulting percentage is the cap rate. For example, if a property generates $100,000 in NOI and its current market value is $1 million, its cap rate is 10%.
What does this mean for investors? Cap rate is an essential metric to consider when purchasing a commercial property. It can help you determine the potential return on your investment and compare different properties’ potential value. The higher the cap rate, the higher the potential return on investment. However, a high cap rate may also indicate a higher risk or a less desirable neighborhood.
Cap rate can also be helpful when comparing properties in different markets or different property types. For example, a cap rate of 5% might be standard for a Class A office building in a major city, but it might be considered low for a self-storage facility in a smaller town. Investors can use cap rate to compare the potential returns of different types of property investments.
It’s important to keep in mind that cap rate is just one metric to consider when assessing a commercial property’s value. It doesn’t take into account factors like demand, supply, location, or other market conditions that can have a significant impact on a property’s value. Cap rate is also a static measurement; it doesn’t include the potential for rental increases, changes in market conditions, or other factors that could impact a property’s income stream.
Our latest video breaks down the key concept of cap rate and how it impacts your CRE investments. 💰 Watch now for valuable insights from Megan! #caprate #commercialrealestate #CREinvesting 🔍📊💼
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