I have heard that when your determine the value of a commercial building you take the rent, lets say 30,000 per year and divide it by the cap rate, say 10%.
therefore the property value is $300,000.
Q. But how do i get the cap rate in the first place? &
Q. What does it actually mean?
Thanks
Cap rate is % after all expences (it does not include if you borrowed money).
Gross % return is how much before expences (it does not includes borrowed money or expences).Simply
Cap rate is % after expences.
Gross yeild is % before expences.Monopoly, my favourite game
The capitalisation rate varies and depends on:
* class of building eg office, retail, industrial
* the state eg tasmania they may require a higher cap rate than in Sydney CBD
* security of the lease and tenant. A long lease to Coles Myer would attract a cap rate of say 5% but if the tenant was a “mum and dad” type business the investor would wanta better return to make up for the extra risk so the cap rate may be 8%
*competing investment rates, when interest rates go up, yeilds on commercial goes up (cap rates) and prices come down
Michael Yardney
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