Back to Menu x The Capitalization Rate or Cap Rate is a ratio used to estimate the value of income producing properties. Put simply, it is the net operating income divided by the sales price or value of a property expressed as a percentage. It is one of many financial tools used by investors, lenders and appraisers to establish a reasonable purchase price for a given investment property in a specific market.
Investors expect larger returns when investing in high risk income properties.
In a real estate market where net operating incomes are increasing and cap rates are declining over time for for a given type of investment property such as office buildings, values will be generally increasing. If cap rates are increasing over time and net operating incomes are decreasing for residential income property in a particular market place, residential income property values will be declining. If you would like to find out what the cap rate is for a particular type of property in a given market, check with an appraiser or lender in that area. Since the frequency of sales for commercial income properties in a given market x place may be low, reliable cap rate data may not be available. When adequate financial data is unavailable, appraisers may construct a cap rate through analysis of it's component parts thus reducing the credibility of the results.