Buying Commercial Property

When buying commercial property what is better a higher cap or a lower cap rate.


Thank you

Comments(2)

  • cjmazur25th June, 2004

    Low cap, pay more for the cash flow generated

    higher cap, you're paying less.

    Short for capitalization rate. The Cap Rate is a calculation that reflects the relationship between one year's net operating income and the current market value of a particular property. The cap rare is calculated by dividing the annual net operating income by the sales price (or asking sales price). From:
    www.chilesandco.com/pages/re_terms.htm

    e.g.

    1M Building (selling) generating 100K flow

    Flow / price = CAP Rate
    100K / 1M = CAP
    CAP=.1 or "10"

    2M Building generating 100K flow
    100K / 2M = 0.05 or "5"

  • commercialking25th June, 2004

    Cap rate= net operating income BEFORE DEBT/price. But Chet has it right, I just wanted to make the part about the mortgage payment not being part of the calculation clear.

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