What's the Cap Rate?

A group of brokers recently asked me to comment on another appraiser’s newsletter. The newsletter reported three capitalization rates, each for a different property. “How can this possibly be the retail cap rate in our region?” they asked about one.

“It isn’t,” I replied. “One sale does not make a market. It’s the capitalization rate for that particular property.” A property’s cap rate is an expression of the relationship between that property’s income and value. It is most often extracted by dividing the property’s net operating income by the property’s recent sales price. An array of capitalization rates must be developed to apply to a property’s NOI to ascertain the property’s value or listing price. Cap rates from recent sales, like the one described above, are most representative of the market, but may be influenced by many conditions which must be analyzed before the cap rate can be applied to another property (for instance, in a market like our current market, are sales price and value equal?). Several cap rates from recent comparable sales will better mirror the market. Capitialization rate surveys, like Korpacz and RealtyRates can also be analyzed. Finance rates should also be analyzed using the Underwriter’s Method, Band of Investment, and Mortgage Equity techniques. An analysis of the entire array of capitalization rates is necessary before application to net operating income.

There is no shortcut to the value of real property, even for BPO’s.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s