Finding the Right Capitalization Rate
Before you purchase any property, be it commercial or residential, you need to know its official property value. Without this information, you could pay too much for it and be upside down in it before the first tax bill arrives. This value is discretionary, so it is significant to start your calculations from the property tax value, because this is the average used to govern the whole neighborhood. Some other components to take into consideration are the condition of the property, and its location. For income producing properties, it is vital to know and understand the capitalization rate. This rate is used on commercial properties the generate income, and it is this income that greatly offsets the true value of the property. What is the capitalization rate or cap rate? The capitalization rate is a ratio used to determine the value of an income-producing property. Basically, the capitalization rate is; Net Operating Income Property’s Value Percentage Profits Added to Basic Value Investors, appraisers, and lenders use this capitalization rate to create an estimate of what the property is genuinely worth. This individual rate is compared with other businesses in the area to determine the neighborhoods cumulative value. The capitalization rate computation incorporates a property’s selling price, non-rental income, gross rental income, operating expenses and vacancy amount. A property tax assessment is usually the first place to start. Sellers of income producing properties are looking for the highest property value, or the lowest capitalization rate. Buyers on the other hand, want the lowest selling price, and the highest capitalization rates. This rate will change from city to city; street to street; business to business and is dependent on crime rates, location and general neighborhood condition. The better the area; the lower the cap rate. Higher capitalization rates are seen in less preferred areas in order to compensate for increased risk. If you recently received an appraisal that includes a capitalization rate, you should know if this was calculated from recent sales in the same area, or if it was calculated. They can be established by dividing the net operating income by the market value. The net operating income can be found by subtracting vacancy amount and operating expenses from a property’s gross income. A few of the common operating expenses can include property management, maintenance, taxes, insurance and advertising. If you are a serious buyer, you should invest in some of the software available the will help you estimate your own capitalization rate by using current information. This can help you narrow down your search for the ‘perfect investment property’. Find your property tax assessment through Hegwood Group before you do anything else.

