What Is a Good Cap Rate for Commercial Real Estate Properties?
Even if you’re just starting out in real estate, you probably already heard the term “cap rate” used quite frequently in discussions by other real estate professionals, whether they talked about residential or commercial properties. In real estate, a cap rate represents a formula that long term investors typically use in order to calculate the returns of a real estate property, and evaluate whether or not it’s a good investment. Cap rates can be calculated prior to purchasing your property, and it can offer some useful data based on which you can influence your decision. However, to make an informed choice, most real estate investment experts will recommend that you also use other means of calculating long term returns as well.
What’s a Cap Rate and Why Is It Important?
A cap rate is a formula used for calculating and evaluating whether or not a real estate investment was profitable over a one-year period. The formula is based on annual returns, which means that, if a property such as a hotel or a retail store, performed well in the previous year, the cap rate will be favorable and that will show in your calculation. Cap rates are mainly important because they help commercial investors assess a property based on its current value and come up with an initial yield on the investment property. So, before buying a property or not, you can look at the cap rate to determine your choice.
A Good Cap Rate for Your Commercial Property
Determining what a good cap rate might be for your commercial real estate property can be a bit tricky, because it depends on various factors, including the property’s location, the overall value of the market it operates in based on its geographic location and the asset type – meaning you’ll get a different favorable cap rate for an office building than for an industrial property such as a factory or a warehouse. Finally, their relationship with interest rates is probably the most complex part of determining whether or not a cap rate might be favorable. As the market and the economy fluctuates, certain interest rates can represent a hindrance or a great advantage based on where you are and what type of property you own.