Cap Rate a Method to Determine the Value of Investment Properties.

Cap Rate a Method to Determine the Value of Investment Properties

filed under: Commercial Real Estate Market, Real Estate Investment Strategies posted on April 23rd, 2010

Cap Rate a Method to Determine the Value of Investment Properties. Many investors and appraisers use a Cap Rate (Capitalization Rate) to determine the value of investment property.

The Cap Rate is calucaled 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 or R=I/V. Likewise, the Value or purcahse price of the property can be determined by using this formula as well. Value = NOI / Cap Rate or V=I/R.

The benifit 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 indentify with comparable transations and data sources with the market. However, once an investment property is found or pirks the interest of a buyer by it’s Cap Rate, they should to 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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This entry was posted on Friday, April 23rd, 2010 at 12:02 pm and is filed under Commercial Real Estate Market, Real Estate Investment Strategies. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.