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

Posted: Sun May 22, 2016 9:09 am
by HarleyDude
I was looking at a few articles about commercial property investment when I came upon 'cap rate' and that it can be a good guide in assessing a commercial property. It however failed to properly explain it properly, probably because I read it from a magazine article which targeted professional investors. Anyone know what it actually is and how can I work it out for a commercial property?

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

Posted: Sun May 22, 2016 12:13 pm
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.


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

Posted: Sun May 22, 2016 5:05 pm
by HarleyDude
I didn't realise that we can get commercial investment loans. Thanks for the info, Otto. The cap rate formula still seems a bit complicated to me since I've just started looking into all this. Will research more and look at your website for now before calling in to discuss my plans.