Buying Commercial Property
When buying commercial property what is better a higher cap or a lower cap rate.
Thank you
When buying commercial property what is better a higher cap or a lower cap rate.
Thank you
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"
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.