How to Calculate Cap Rate in Commercial Real Estate

If you’re interested in commercial real estate then there is a good chance you’ve already heard of the word “Cap Rate”

Cap rate, short for Capitalization Rate, calculates the estimated rate of return for your commercial investment. It’s a quick and popular method for investors to see the property’s potential as a percentage and to compare with the relative value of similar real estate investments. 

Calculation

Net operating income / Purchasing Price = Your Cap Rate 

In our example let’s imagine that the Net Operating Income is $150,000 and that the Purchasing Price is $3,000,000.

$150,000 / $3,000,000 = 0.05 = 5%

Interpretation

Typically a larger cap rate means less appreciation. Commercial Properties in Vancouver have a lower cap rate because the properties there see higher appreciation. Their Cap Rate would tend to average at 3%-5%. Whereas further out into the interior it would be more common to see 6-8%.

However for those who are looking for a good Cap Rate for the areas in the Fraser Valley, generally a good cap rate would be between 4%-4.5%. 

Surrey being a particularly excellent choice for commercial investments as a good cap rate could be found in Surrey between 3.5%-4%. 

Conclusion

Of course there will and should be other factors to consider when choosing your commercial investment rather than a sole reliance on the Cap-Rate. The investor will also need to keep in mind that there might be other risks to account for beyond a good Cap-Rate, or that there might be other benefits to a property beyond a higher Cap-Rate. 

Start your commercial real estate investments by contacting Jas Oberoi Group


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