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CAP Rate a Method to Determine the Value of Investment Properties

CAP-RATEMany investors and appraisers use a CAP Rate (Capitalization Rate) to determine the value of investment property.

The CAP Rate the a percentage that relates the value of an income-producing property to is future income.  It is calculated by determining the ration between the purchase price (Value) and the Net Operating Income (NOI) of the property.  The formula being: CAP Rate = NOI / Value (purchase price), or R=I/V.

Example: A property has an NOI of $100,000, and the price is $1,000,000, the CAP rate would 10% ($100,000/$1,000,000).  Based on this calculation, you would see a return in 10 years.

The benefit to using CAP Rate as a measurement of the value of property is that it is easily calculated and accounts for the operating expenses of the property.  It can also allow the buyer – investor to compare and identify with comparable transactions and data sources within the market.    However, once an investment property has perked the interest of a buyer by it’s CAP Rate, the buyer should further calculate the return on investment as well.  This is known as Return on Cash or Cash-on-Cash.  I will discuss this in a future blog

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Ark Rhowmine | Commercial Real Estate Advisor Broker
NAI Pfefferle
200 Washington St. Suite 100 | Wausau | Wisconsin | 54403
C: 715.297.1953 | F: 715.355.6044
ArkR@NAIPfefferle.com

COMMERCIAL REAL ESTATE SERVICES, WORLDWIDE.

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