What's a cap rate and how do I work one out?

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Otto Dargan
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Re: What's a cap rate and how do I work one out?

Post by Otto Dargan »

Hi HarleyDude,

A cap rate or capitalisation rate is a quick way to estimate the potential return on investment (ROI) on a commercial property. It's considered to be the main method used by commercial valuers. However, it's important to be cautious when applying the cap rate as there are many factors that can influence the price that you should be paying for a commercial freehold.

You can work out the cap rate using this simple formula:
Capitalisation rate = Net operating income / Current market value

Another way you can use the cap rate is to work out the actual market value for the property by comparing the cap rates of comparable sales in the area and rearranging the formula as such:
Market value = Net operating income / Cap rate

Please go through our website for more detailed information on this.

Our mortgage brokers specialise in commercial property loans and investment loans. So if you want to discuss anything related to these including commercial investment loans, you can speak with one of our expert mortgage brokers directly by calling 1300 889 743 or enquiring online.

Cheers,
Otto
Otto Dargan
Mortgage Broker
P | 1300 889 743
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