What is Capitalization Rate?

What is Capitalization Rate (Cap Rate)?

When it comes to investment real estate cap rate is sometimes misunderstood. Cap rate is a percentage of return for a projected 1-year window of an investor’s return on its upfront cash investment after expenses. To calculate Cap Rate, it is simply net operating income (NOI) divided by purchase price. How are Cap Rates determined? Cap rates are influenced by the following factors.

  1. Location of the property. Can the investor replace the tenant easily if the tenant defaults? Does it maintain its value?
  2. Financial Capacity of the Tenant. This determines the risk of actually getting paid by tenant.
  3. Length of the Lease.  How long will the investor receive this return? Are there any outs?
  4. Capital Improvements that will have to be done. Will the investor have to spend money on the roof, mechanicals, parking lot replacements?
  5. Responsibilities of the Landlord. The fewer the responsibilities the lower the return they are willing to accept or in other words the investor is willing to pay more for less requirements of their time.

The analysis and negotiation of leased investment property can be complex and strategic. Gerspacher Real Estate Group has significant experience navigating the purchase of these assets. If you are considering these investments, please contact us and we would welcome to opportunity to discuss.

 

Sam Tecca,  Agent & Consultant

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