Brandon Florida Commercial Real Estate - What is CAP Rate?

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For those of you interested in commercial investment opportunities, here is a brief explanation of CAP rate, a common way of comparing one investment property against another.

The CAP rate is simply what percentage of the purchase price will be earned back each year as Net Operating Income (before taxes and debt service). So for example, if the purchase price of a property was $100,000, and Net Operating Income is $10,000/year, the CAP rate would be 10%, meaning 10% of the purchase price will be earned as NOI each year if income and expenses stay the same.

Here's another example:

Annual Income $30,000
Annual Expenses $5,000
Net Operating Income $25,000

Property asking price = $450,000
Let's assume the eventual sale price is $400,000

The CAP rate would be $25,000 divided by $400,000 = 6%. Although not out of the range of possibility, most investors won't start looking at these types of investments until the CAP rate is 9%, and they would rather it be 11% -12% so their investment is paid for more quickly.

If you are the seller, in order to get your CAP rate up to say 9% so investors will start looking at it, either the Operating Income needs to be higher or the sale price needs to be lower. If income and expenses are accurate, you can reverse the equation to find what the sales price should be in order to meet the 9% CAP rate requirement.

$25,000 NOI divided by 9% CAP rate = $277,778 necessary sale price. Now this will most likely frustrate the seller, but a property is only worth what a buyer is willing to pay for it, and most investment buyers are sophisticated enough to do this simple math and find out that a sale price of $400,000 is way over priced for investment purposes.

I hope this explanation of CAP rate is helpful. Please call or email me if you have any questions about residential or commercial real estate in Brandon or Tampa Florida.

Randy, The House Man

www.TampaHouseMan.com

Randy@TampaHouseMan.com (813) 846-9190.

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