(Global) CAP rates and Property Valuation

  

 

How does one tell the current value of a property? If it is a residential, there is the comparison method in which an appraiser compares some recently sold properties and arrives at an answer. This may work well for residential but for multifamily properties, the calculation is based on a more business like approach. This is called the Capitalization rate or CAP rate for short. Normally, the more valuable a property is, the greater it’s income. 

Here is a general method to calculate the CAP rate for a property: 
·  Get the recent sold price of an income property, such as an apartment complex. 

Example: Six unit apartment project sold for $600,000 

·  For that same apartment project, determine the net operating income, or the net rentals realized by the owners. 

Example: The rental income after expenses (net) is $48,000 

·  Divide the net operating income by the sale price to get cap rate. 

Example: $48,000 / $600,000 = .08 or 8% (The Capitalization Rate) 

Typical market norms can be obtained from your mortgage broker or sometimes a realtor who specializes in investment properties.