Cap Rate for Commercial Property

Capitalization rate for CAP Rate is the desired profit percentage for an investor. Let’s not forget a valuation is a correlation between the income the commercial property produces and its valuation. By using value rates correctly, an investor determines a market value for the property. When Cap rate is used , we are using the “Income Approach” to determine an opinion of value.

Approaches to Valuation

When valuation is done to a property, there are 3 ways to determine value.  They are: Using a  Comparable, Replacement Value or an Income Approach.

Calculation , Here is an example of how to determine cap rate valuations for a commercial property. A property has a NOI (Net operating income) of $50,000 and an asking price of $500,000 this would equate to a 10 cap valuation.  Taking  $50,000 /500,000= .10 . So the equation is NOI / Market Value = Cap Rate.

Other Cap Rate Valuation Methods 

There is a method called the discounted cash flow model. This model looks at the property for the entire period the commercial property is to be held. It takes the estimated NOI for each year and estimates the sales price at the end of the holding period. When using this method , current discount rates are factored in and present value is calculated.  This data is also used in IRR or internal rate of return calculations.  The internal rate of return is a percentage of return over the whole holding period which is a more complicated calculation. For more commercial real estate terms click here.

Information about Business Valuations.