A cap rate is a glimpse of possible ROI that’s promised by a multi-family residential or commercial real estate. In short, assuming you paid cash for the property (without financing), then investing with a 5% cap would give the investor a yield of 5% in returns.
Investments at Different Cap Rates
Real estate investors tend to invest at different cap rates according to their budget and risk tolerance. It should also be noted that the capitalization rate may vary from higher cap rates meaning the commercial real estate needs repair or has vacancy issues, to commercial real estate at lower cap rates which may mean a more stabilized property. Investors are advised to research and compare cap rates since the difference can be significant especially when seeking refinancing or acquisitions.
Finding Cap Rates of Commercial Real Estate
It is no secret that real estate property management services use the cap rate as one of the factors to determine the value of commercial real estate. Quite similar to the multiples in traditional equity markets, the capitalization rate of commercial real estate properties is measured as percentages ranging from 3% to 20%, depending on the size and location of the commercial real estate property.
When the cap rate is high, the property has a lower price and higher returns, but with potential risks. On the other hand, lower cap rates indicate a lower risk and higher value. A simple formula to use for calculating cap rates of real estate properties is as follows;
NOI/Current Property Value = Cap Rate x 100
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Measuring the cap rate of multi-family residential or commercial real estate offers a quick and easy method of determining the expected cash flow potential, allowing real estate investors to make a more informed decision. If all this seems too complicated for you, real estate management services such as Milbrook Properties are here to help you navigate through the murky waters of commercial real estate and cap rates once you decide to invest in commercial real estate.