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Cap Rate Definition Commercial Real Estate
Year 1 NOI = Cap Rate PRICE
A capitalization rate is simply the rate of Year 1 Expected Net Operating Income / Price. Future expectations - beyond Year 1 - are not mathematically involved in the intentionally-simple Cap Rate math.
The Cap Rate formula excludes these relevant items:
1) Changes in cash flows after Year 1
2) "Below NOI expenses":
structure, etc.)
5) financing costs 3) Real estate inflation or deflation. Future overall value changes caused by 1) subject property's risk changes 2) market's shift in cap rate / yield levels. (This rate is not related to general inflation like inflationary increases in rents, expenses and NOI.)
"Yield" is the real return.
Cap Rates are said to be "yield driven" because real return is what is important to knowledgeable investors. As an investor, I don't care about the cap rate - I care about the yield! For example, if the yields and risks are projected to be the same, over the same holding period, an 8 cap priced property can be equivalent to a 7 cap priced property.
A Cap Rate is not a consistent measure or fully inclusive measure of return like Yield. Yield is the real return. "Expected Yield" is the average annual real return you expect from purchase to sale - start to finish. This is the all-inclusive consistent measure upon which investment real estate is priced by expert buyers and sellers.
-- Stuart Haxton
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1) Market openly nationwide - make property information easy to find & download on the internet. Don't restrict marketing to the internal networking of a big brokerage firm. 2) Develop a plan to reach the most & best buyers. 3) Design excellent & complete marketing brochures (so buyers don't get frustrated and move on). *Premium Marketing Example* 4) Offer an Argus run to buyers, if 5+ tenants. 5) Understand tenant expense structures. 6) Don't offer unpriced. 7) If TI's and Leasing Commissions are low, make sure this is stated! 8) Communicate the investment clearly. 9) Create great Argus & Excel financial presentations. 10) Print this page Marketing Nationwide
Other articles on the web: Life Cycle of a Commercial Property Listing
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