Last section we went over NOI, lets explore another interesting concept called CAP rate.
What is CAP rate??
CAP rate is an important metric to calculate the value of Commercial properties.
Its short for Capitalization Rate.
Simply, it is calculated as -
Capitalization Rate = Net Operating Income / Current Market Value
e.g. If NOI of an apartment complex is $50,000 per year and the Market value is $500,000 then the CAP rate is 10%
Some people use the CAP rate as “Return on their Investment”
Rearranging the equation
Current Market Value = Net Operating Income / Capitalization rate
CAP changes based on quality of location/ quality of property/ tenant base and more.
Lately market has seen “Contraction” of CAP rate across the board due to multiple reasons driving the prices higher but with proper underwriting and business plan we can still achieve the goal regardless!!
Last section we went over NOI, lets explore another interesting concept called CAP rate.
What is CAP rate??
CAP rate is an important metric to calculate the value of Commercial properties.
Its short for Capitalization Rate.
Simply, it is calculated as -
Capitalization Rate = Net Operating Income / Current Market Value
e.g. If NOI of an apartment complex is $50,000 per year and the Market value is $500,000 then the CAP rate is 10%
Some people use the CAP rate as “Return on their Investment”
Rearranging the equation
Current Market Value = Net Operating Income / Capitalization rate
CAP changes based on quality of location/ quality of property/ tenant base and more.
Lately market has seen “Contraction” of CAP rate across the board due to multiple reasons driving the prices higher but with proper underwriting and business plan we can still achieve the goal regardless!!
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