Cap Rate Variations

Everyone in real estate knows how to calculate a cap rate — or do they?

Commercial real estate professionals live and breathe capitalization rates. Every trade publication, market participant, and third-party report relating to real estate quotes cap rates for various markets and properties. But ask a group of real estate professionals to calculate a specific property`s cap rate and you are likely to get a variety of answers - despite the simplicity of the formula. If cap rates are widely used and easily calculated, then why does everyone come up with a different answer?...

...Cap Rate Overview

A cap rate in its simplest form is a return on an investment based on the principle of anticipation. Value is the present worth of future benefits. A cap rate attempts to quantify the risk profile of the future benefits. It is calculated by using a non-complex formula, R=I/V, where I is the net operating income and V is the value of the property. In more complex terms, a cap rate measures a single-period, unleveraged rate of return on a real estate investment. By converting income into value, a cap rate expresses the relationship of one year`s income and value....

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RSK: As usual one can fudge or forget some numbers to get the NOI to read a bit higher..i.e. management fees. Good primer on Cap Rates of which I am not a huge fan of but respect it as a quick measure of value...but not the final.