How to Calculate a Propertys Capitalization Rate

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To calculate the capitalization rate or cap rate, you would divide the property's annual net operating income by its estimated value. For example, a property with an annual net operating income of $36,000 and an estimated value of $360,000 would have a cap rate of 10 percent ($36,000 + $360,000 = 10). In most markets, cap rates between 9 percent and 11 percent are considered good. In most markets, it is hard to find reliable capitalization rate data for small commercial properties. That's because in most markets, there are generally fewer sales of small commercial properties from which to gather comparable property sales and income data. This results in property appraisers having to construct capitalization rates that are not based on verifiable sales and income data, but rather on what is known in certain property appraisal circles as the SWAG Principle, which is an acronym for "some wild ass guess." Unless you can find bona fide cap rate data that is based on actual sales of comparable small commercial properties, I would be leery of using any cap rates that were nothing more than a figment of some owner's or appraiser's imagination. The point that I am making here is that you do not want to estimate a property's current market value based on a bogus capitalization rate. Depending on the volume of sales in your market, you should be able to get capitalization rate data from local:

1. Property appraiser's or assessor's office.

2. Apartment owners' association.

3. Commercial mortgage lenders.

4. Commercial property appraisers.

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