What does CAP (in commercial real estate) mean?

Question

I see commercial properties for sale in the newspaper. Often times it will make a reference to "Cap" such as 8x or 7x cap. Could someone tell me what that means?

Answer 1

CAP Rate,Capitalization Rate, is a indicator for commercial property investors to measure the profitability of a particular building. It is derived by dividing the NOI (Net Operating Income) by the Price of the property. To calculate the NOI, take the total income and subtract the total operating expenses.

Example: If your are the seller and if your NOI is $800,000 and you are asking $10,000,000 for the property , you are offering the property at an 8% return. On the other hand, if you are the buyer and you are looking at a property that is generating $800,000 in NOI but you want a 10% return, you would offer$8,000,000 for the property ($800,000 divided by 0.10 (10%) ).

The higher the CAP rate the lower the price (better for the buyer). The opposite is true for the seller.

Answer 2

Listen to Robert, he knows what he is talking about. Another way to think of the math is NOI / Cap Rate = Market Value.

As you can see, the cap rate is in the denominator. Market Value and and cap rate are inversely proportional.

The cap rate is set by the market. In general, low interest rates make for a low cap rate because there are fewer better investment alternatives. A property in a very desirable or trendy area will also have a low cap rate because people are willing to pay more for the real estate for reasons other than simply rental income.

Hope this helps.

Answer 3

What Does Cap Rate Mean

Answer 4

In MY case, it means Can't Afford this Property!

Oh, lighten up, for cryin' out loud.

Answer 5

can someone tell me what is the right answer for this question?

Answer 6

Thanks for the answers EVERYONE xx