Are you just beginning to look into commercial real estate and curious about the term, “cap rate”? As a formula, you divide the net operating income (NOI) of a rental property by the value of the property. Thats will give you a percentage. The percentage shows the annual rate of return on the rental property. You can discuss the cap rate with one of our agents or if you’re curious right now, you can easily find an online Cap Rate Calculator.
This formula might seem simple enough, but many factors actually can affect the cap rate of a real estate property. The net operating income is of course, affected by operating expenses like property taxes, property management, utilities for common areas, association fees, insurance, and more. For total accuracy, you’d likely factor in a vacancy rate as well. You subtract these expenses from the gross income from tenants and you will have your NOI.
The Cap Rate Determines Profitability
The cap rate on a property is what’s used to figure out how profitable an investment property would be. Property investors use the cap rate to estimate the potential return on an investment (ROI) of a particular property. It gives investors a really quick, accurate estimate of the property’s profitability, so that they can compare properties against each other before investing.
Still, this isn’t the only metric investors use. Let’s say you were planning to flip an investment property, other metrics would be better to determine if the purchase is right for you. If you don’t intend to rent out the property, the cap rate won’t necessarily be the metric that you use.
What’s a Good Cap Rate?
It can be challenging to answer this question directly. It depends on your goals as an investor. Good cap rates also vary from state to state too. Sometimes even in neighborhoods within the same market. The type of property can also affect cap rates. Multi family homes used for leasing apartments can have lower cap rates. Afterall, multi family homes rented as apartments would be a less risky investment for an investor.
Professional investors purchasing commercial properties, might buy at a 4% cap rate in high demand areas and a 10% cap rate in low-demand areas. This range is usually considered a reasonable range for commercial property investors.
RE/MAX Keys Connection
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RE/MAX Keys Connection’s owner and broker Curtis Skomp is one of South Florida’s top commercial real estate brokers. With over two decades of experience and a CCIM (Certified Commercial Investment Member) designation, Curtis has brokered commercial real estate including industrial properties, shopping centers, strip malls, trailer parks, bars, restaurants, hotels and multi-unit apartment buildings. Unlike many brokers, Curtis isn’t intimidated by bank foreclosures either.
RE/MAX Keys Connection offers clients international exposure with local service. Our service area includes Key West, Big Pine Key, Marathon, Islamorada, Key Largo, and all of unincorporated Monroe County. Our office is fluent in Spanish, which is highly important when doing business in Southern Florida.