What is a Cap?
Posted on 22. Jan, 2010 by danwilson in View Recent News
The Capitalization Rate or Cap Rate is a ratio used to estimate the value of income producing properties. The cap rate is the net operating income divided by the sales price or value of a property expressed as a percentage. Investors, lenders and appraisers use the cap rate to estimate the purchase price and market value for different types of income producing properties.
The lower the selling price or market value, the higher the cap rate and vice versa (the higher the selling price, the higher the cap rate. Cap rates are affected by many factors which go into the assessment of the risk of the property. This can include the location, age/condition of the building, strength of the tenancies, rental history, etc. An investor would likely expect a higher return when investing in higher risk income properties.
The past few transactions in the Comox Valley for investment properties (that is, sold fully occupied with tenants in place) have suggested overall capitalization rates in the range of 7 to 7.5% for purchases in the $400,000 to $1,000,000.00 range.
