February 25, 2019

What Is Cap Rate in Commercial Real Estate?

If you are new to the commercial real estate world or you are a business owner seeking office space for lease, you might be feeling a little overwhelmed. The sheer amount of terms and options to decide from can be intimidating without the right help. It always pays to hire a professional commercial real estate broker like the Rakow Group to help you find the best commercial property for sale. One term you might have heard mentioned before is the cap rate of a property. Cap rate, or capitalization rate, is a basic concept that refers to a percentage number which determines a property’s current value. It’s derived from an estimate of the property’s future net operating income. We will discuss some of the basics about capitalization rates in commercial real estate below to provide you with some powerful insight.

The cap rate is typically calculated by looking at appraisals or what similar properties have sold for in recent times. The actual equation simply takes the Net Operating Income of a property and divides it by the property value. However, calculating the cap rate for commercial real estate can be a complicated endeavor. That’s why it helps to work with a great commercial real estate broker like the Rakow Group.

It’s important to understand that the ways that different properties are evaluated impact the cap rate. For example, apartment buildings are viewed as property types that generate great cash flows, which is reflected in the cap rate. Office space real estate, on the other hand, will be viewed differently.

You might be wondering what a good cap rate is for a property? This depends on whether you are on the buying or selling side. If you are looking for commercial property for sale, you want a cap rate that is higher because your initial investment will be lower. On the other hand, if you are selling commercial property, you are looking for a capitalization rate that is lower because your property value will, therefore, be higher. It always helps to look at similar property’s cap rates to compare your calculations. Keep that in mind if you are trying to come up with a cap rate on your own. If you are looking for help with cap rate calculations or finding comparable properties to use, the Rakow Group can definitely help.