What Is A Cap Rate & Where Do They Come From? How To Value Income Producing Real Estate
Thinking about buying or selling a commercial income property here in the Enchanted Circle? Before you do anything, you need to understand cap rates. That one number drives what a property sells for.
What A Cap Rate Actually Is
Cap rate is short for capitalization rate. It's the income return a property produces based on its price. The math is simple. A property that costs one million dollars and produces $100,000 a year in net operating income has a 10 percent cap rate. Price and income, that's it.
Where Cap Rates Come From
Cap rates come from the market, and they move. Apartment complexes often trade somewhere around 4.5 to 6 percent for many stabilized or value-add deals. That number shifts with interest rates, demand, property condition, location, and risk. The market sets the rate, not the seller.
Why Buyers And Sellers See It Differently
Here's where folks get tripped up. If you're selling, you want a lower cap rate, because a lower cap rate pushes the sales price up. If you're buying, you want a higher cap rate, because you're paying less for the income stream and earning a better return. Same number, two opposite goals.
Cap rates aren't complicated once you see what they measure. Whether you're buying or selling commercial real estate in Taos, Angel Fire, or Red River, knowing the rate puts you in a stronger position.
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Have questions or want to learn more? Give us a call at 575-613-4243. We're happy to help.
Rob Swan | Qualifying Broker | Swan Realty Inc.
