The cap rate calculator for commercial real estate, will give you the cap rate based on Net Operating Income. Reverse calculate cap rates by entering the NOI of the property and it will calculate a sale price, based on the desired cap rate.
How to Calculate Cap Rates
The cap rate calculator for commercial real estate, will give automatically calculate the cap rate based on Net Operating Income and Purchase Price.
The calculation for Cap Rate works like this: Net Operating Income / Purchase Price = Cap Rate. (See example below)
Reverse calculate the cap rate by entering the NOI of the property and it will calculate a sale price, based on the desired cap rate.
To calculate the sale price of commercial real estate based on a average cap rates: NOI / Cap Rate = Sale Price.
For example: NOI $100,000 / Cap Rate 0.06 = Sale Price $1,666,666.
Buying Commercial Real Estate With a High Cap Rate
Investors looking for buy a piece of commercial real estate will always be looking for a property with a high cap rate. A high cap rate for the buyer always means that you are getting a higher return.
For example:
- Purchase Price: $1,000,000
- Net Operating Income: $100,000
- Cap Rate: 10%
Sell your property for the Lowest Cap Rate
Lower cap rates are beneficial to the seller of a property. In the example above, we showed the property value at a 10% cap rate. Below will show the same NOI of $100,000 a year, but selling at a 5% cap rate.
For example:
- Purchase Price: $2,000,000
- Net Operating Income: $100,000
- Cap Rate: 5%
When discussing cap rates, it really depends which side of the table you are sitting on!
If you are a buyer trying to get a better loan from the bank, then a high cap rate is good. If you are selling your property, you want your broker to be showing how Cap Rates in the area are much lower, and there is no reason to sell the property at such a low valuation.
What causes Cap Rates to increase or decrease?
There is a very profound piece we saw from JP Morgan that read like this:
In periods of stress, such as the Great Financial Crisis, cap rates have increased while interest rates decreased, a result of investors taking on more risk to own commercial real estate. In expansionary cycles with moderate interest rate increases, cap rates may remain unchanged if investors can expect increases in income and still achieve their expected return over their investment horizon.
JP Morgan
What does this all mean? Well in very basic terms, why would an investors buy a piece of commercial real estate that has a cap rate of 4%, when they can open a savings account and earn 5%.
The risk of owning an apartment building, and maintaining that investment, should have a better reward that parking your money in cash.
At the same time, interest rates play a role in determining cap rates. If mortgage rates are going up, and the buyer will need to get a mortgage at 7% interest. How can they afford to buy the property at a 6% cap rate?