What is a good commercial cap rate?
Table of Contents
What is a good commercial cap rate?
It is expressed as a percentage and can vary widely depending on the real estate market, asset class, property type, and tenant base. In commercial real estate, most properties trade in a cap rate range of ~3\% – 20\%.
What does a 7.5\% cap rate mean?
With that caveat, to understand a CAP rate you simply take the building’s annual net operating income divided by purchase price. For example, if an investment property costs $1 million dollars and it generates $75,000 of NOI (net operating income) a year, then it’s a 7.5 percent CAP rate.
Do sellers want a high cap rate?
Buyers usually want a high cap rate, or the purchase price is low compared to the NOI. But, as stated above, a higher cap rate usually means higher risk and a lower cap rate usually means lower risk.
What is a good cap rate on real estate?
In general, a property with an 8\% to 12\% cap rate is considered a good cap rate. Like other rental property ROI calculations including cash flow and cash on cash return, what’s considered “good” depends on a variety of factors.
Why is the cap rate important?
The capitalization rate is the most commonly used baseline for comparing investment properties. It is analogous to the estimated effective rate of return on a typical security investment. This figure helps real estate investors determine the best use of their investment funds.
How do you calculate cap rate for commercial property?
How Do You Calculate a Cap Rate?
- Gross income – expenses = net income.
- Divide net income by purchase price.
- Move the decimal two spaces to the right to arrive at a percentage. This is your cap rate.
Why are cap rates so low?
The reason that cap rates are low in so many real estate markets is because investor sentiment is bullish. In other words, people are willing to pay more for NOI in a safe and stable market rather than put their investment capital at risk.