ORION REAL ESTATE
630 First Street South
Waite Park, MN 56387
320.251.1177

QUESTION:  I’ve heard the words “cap rate” used in valuing investment properties. What exactly is a “cap rate”?
   
ANSWER:  It stands for capitalization rate. Essentially, a cap rate converts income into a value. A property’s net operating income is divided by the cap rate and the resulting number determines it’s value. This calculation is very simple. The problem is arriving at the appropriate cap rate. Differences in cap rates can change a property’s value dramatically. Even a 1/2 % difference in the cap rate can be significant. Many factors go into determination of this rate. Type of property, current interest rates, risk and other factors need to be considered. There are entire books written about cap rates. I hope this brief explanation is helpful.

If you have questions about buying or selling a business or other commercial real estate, please don’t hesitate to contact us at any time. 

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