What’s capitalisation rate?

Hi PenguinJr,
Capitalisation rate is the income divided by the purchase price as a percentage,
The lower the capitalisation rate, the higher the value.

Regards
Steven
Mortgage Broker

[email protected]
http://www.mobilemortgagemarket.com.au
Ph:1800 820 500
Victoria

PLEASE note comments made should NOT be taken as specific taxation, financial, legal or investment advice. Please seek professional, specific advice.

The capitalization rate [or “cap rate”] is a ratio used to estimate the value of income producing properties.

Put simply, it is the net operating income divided by the sales price or value of a property expressed as a percentage.

Capitalization rates typically range from 8 to 12 for commercial and residential income properties. A high capitalization rate suggests that the cost of acquiring a property is low relative to the income generated by the property.

Example 1:

A property has a NOI [Net Operating Income] of $155,000 and the asking price is $1,200,000

Cap Rate = $155,000 divided by $1,200,000 X 100 = 12.9 rounded

Example 2:

A property has a NOI of $120,000 and Cap Rates in the area for this type of property are 12%.

Estimated Market Value = $120,000 divided by .12 = $1,000,000

Net operating income in the above calculation is equal to gross income minus the vacancy amount and operating expenses.

Operating expenses include such items as advertising, insurance, maintenance, property taxes, property management, repairs, supplies and utilities and do not include depreciation, interest and amortization.

— Michael

I don’t think that is necessarily the case Penguin. No-one has said that.

Pisces

Hi Penguin Jr

If you are looking for CF+ property then yes you are looking for a high cap rate.
There is a reason why properties have different cap rates though. As an example when McDonalds sold some stores here (WA) they sold at a price which represented a cap rate of 8.5 because purchasers were prepared to pay more for a quality tenant. In contrast there is a commercial laundry for sale in a regional town and based on the asking price the cap rate would be around 12.

Regards

SMTM

penguin, i call cap rates ‘yields’.
The properties i buy and have helped others find (10 to date all up) all have yields of over 15 -20 percent and should break even at 9-10 after holding costs

I know this sounds like a myth to the non-believers but it’s absolutely possible, and right now!!!