Cap Rate HELP, Thanks Biggerpockets!

4 Replies

Hey BiggerPockets, I just have a quick question.

Let's say I put a 400k down payment on 2 million dollar commercial building. What would my cap rate be like?
Or what should I be expecting as my annual return?

Also Let's pretend this 2 million dollar building has a cap rate of 7.7%

@John D.

If you pay $2M for a building valued at $2M at 7.7 cap, then your cap rate is... well... 7.7 (i.e. never had to say it this way but...)

Your down payment would not affect cap rate, it would however affect annual return.

Cheers... Immanuel

What would my return look like if I took out a loan of 80% to purchase this building? Just a rough estimate

@John D.

Depends on the interest rate you're paying, obviously the lower the interest rate the higher your return would be. The usual scenario is to leverage your return higher by borrowing at interest rate lower than your cap rate.

In your example, assuming no capital expenditures, loan costs, closing costs, etc... a 7.7% CAP and 80% loan, rough estimates of your CoC return at different interest rates might look like below:

Interest Rate Cash on Cash Return
4.0% 15.6%
5.0% 12.7%
6.0% 9.7%

As you can see the lower the interest rate on the loan the higher the return.

Cheers... Immanuel

You need to calculate the NOI to determine the CAP rate.
Cap rate = NOI/purchase price.

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