How to figure out cap rates

Question

How does everyone usually figure out the average cap rates for their area? I read about a few different methods to see how people can come up with different ones when looking at them on a deal by deal basis. However, if you are trying to see if a deal you are interested in is average with the area, how do you know what the general area rate is?

Joel Owens · Answer

Pete the question is way too broad.

If you are talking commercial there are tons of different types and all are underwritten differently with some commonalities.

You might want to drill down on a specific type you are interested in first ( example: retail, industrial, office,hotel,etc.) and then a deal size range ( 1 million, 2 million in price), sq ft range 10,000, 50,000, 200,000 etc.

The bigger yo go in size the more likely you will need to expand your area to find more properties. Especially if you are in a weak suburban to rural area. If strong suburban to urban core there is generally more product built out and density is higher for the various real estate asset classes.

You have stabilized cap rate, going in cap rate, dark space value,etc.

If you are trying to buy something yourself then get a qualified commercial broker that is a specialist in the sector. You will generally get farther and faster trying not to reinvent the wheel.

Mike Dymski · Answer

discussions with brokers and analyzing a lot of deals

Quentin West · Answer

@Pete Schmidt I agree with @Joel Owens, you are probably better off seeking out a commercial broker to help you with this. Furthermore, if you are planning on buying, the market cap rates aren't that important in my opinion. What is your target return? You may find something trading at a higher cap rate than normal for the area, but if it doesn't meet your target return are you still going to buy it?

Things tend to change a bit when you go to sell and need to determine a sales price...

Pete Schmidt · Answer

gotcha.  Thanks

How to figure out cap rates

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