The cap rate of a property is a popular measure of its value for two reasons:
- The concept of cap rate is easy to grasp (i.e., the ratio between the net operating income of a property and its capital cost).
- A property’s historical cap rate is easy to extrapolate to predict its future income.
Consider other factors that are just as indicative of a property’s worth.
Components also essential to examine before investing in a property.
- Rent per square foot (is the rent high, low, or average for the area?)
- Average annual population growth of the 1-5 mile radius surrounding the property
- Average household income for the 1-5 mile radius surrounding the property
- Tax incentives provided by the city or state in which the property is located
- Quality of neighboring tenants (e.g., big box retailers versus small businesses)
- Location in relation to major streets and intersections
- Internal rate of return (IRR) based on your tax bracket and deprecation benefits
- Ability of the tenant to gain a long-term, low-interest loan
The cap rate of a property is important for predicting its value, but it is essential for investors to see cap rate as what it is: one of many factors that help investors and property brokers determine the prospective value of a property. 201-541-0371 Howard Heckler Call to discuss opportunities Nationwide