What is considered "good" for a specific market can vary based on what you're looking for and for the average in that area. The short answer to "what is a good cap rate?" is that it depends. This is something you'll have to take into account when you're researching investment opportunities in different states.įor example, if you're living in Southern California and are used to looking at the average local cap rates, you'd be surprised at what you find in markets like Houston, Salt Lake City, or Boise. What is typically labeled as a "good cap rate" can vary significantly as you look at properties across different markets. Below is a typical list of operating expenses to include/not include: If expenses are misrepresented, NOI can become skewed, thus making the cap rate a poor estimate of value for the property. In this case, the cap rate is a calculated prediction of what future expenses/price will be. Of course, if you're working with new build proformas, there won't be actual numbers. Make sure that you are doing your best to find actual numbers and not just estimates of what your operating expenses might be. Most inaccuracies in calculating cap rates stem back to mistakes made in determining net operating income. Its annualized rent roll is $100,000 with operating expenses totaling $40,000. Net Operating Income (NOI) = the sum of all potential income - vacancy & operating expenses.Īn Example of Calculating Cap Rate: (via BiggerPockets )Ī 10-unit apartment building is offered for sale at $1 million. The Cap Rate Equation:Ĭap Rate = Net Operating Income / Purchase Price Specifically, it's Net Operating Income, or the gross rent that the property collects less it's vacancies and operating costs (see example calculation below). So when we look at the cap rate on a property, we're going to be focusing on two factors. If you're looking to compare two investment proformas in order to decide where to put your money-remember that cap rate is how much money the property generates relative to the price you pay.
In many ways a cap rate is similar to gross rent multiplier (GRM), but with a more precise look since as it considers operating expenses and vacancy as well. The capitalization rate is a mathematical measurement that represents how much income a property produces relative to its purchase price. You've maybe heard it called "cap rate", or maybe just "cap". What is a Cap Rate? arizona market research phoenix the fig process Dec 14, 2020
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