What About CAP Rates?
A Basic Primer on Capitalization Rates and Consideration
Commonly known as “Cap Rate”, the Capitalization Rate is a factor in determining the value of the property and the effect on the owner of a property. This is a short overview of this simple tool and how it may be used in determining value.
How do you calculate the CAP Rate?
CAP = NOI / Price
NOI = $100,000
Value = $1,800,000
CAP = 5.56
How do you calculate the Price, or Value of a Property?
Value = NOI/CAP
NOI = $100,000
Market CAP = 7%
VALUE = $1,428,571
What CAP Rate should be used to determine the value?
It depends on two variables: Tenant Risk and Market CAP
Market Cap Rates are determined by the nature of the tenant and the term of the lease. Additionally, in the event of eminent domain, the effect of condemnation blight must be considered.
The Multiple Method
There is another method to utilize rather than dividing the cap rate by the NOI. You could just use a multiple which gives the same results. Simply determine the price by multiplying the multiple by the NOI.
For example, if you have determined that the cap rate in the market for a credit tenant is a 5 CAP then you can take the NOI times 20 and come up with a very easy calculation for the value.
This is of course only a simple table. There are more complex examples out there but you get the idea. You can build your own multiples as needed if you simply run your favorite range of Caps you like to use.
Be aware that the links below may not reflect the market accurately. Use any other resources that you can find to compare with, as some of these articles were written before the current market data.
Some interesting Links for study:
Investopedia Cap Rate:
CAP RATE VARIATIONS
MANY WAYS TO QUOTE A CAP RATE
What is a good Cap Rate?:
Risks of NNN Investing:
How to show Government a Higher Value:
Costar – a good data resource: