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COMMERCIAL REAL ESTATE INVESTMENT ANALYSIS WHAT IS CAP RATE?
Cap Rate, which is a very commonly used measurement and comparison tool, reflects a one-year relationship between Net Operating Income (NOI), and price (or value). NOI, which is a very key figure in investment analysis of all types, is defined as rents received from all sources, minus owner-paid Operating Expenses. For our purposes, we will use the simplified rent minus Operating Expenses equals NOI. In the real world, NOI Calculations usually involve an allowance for Vacancy and Credit losses (VNC losses). These VNC losses used in the calculation of NOI could be the actual vacancy for the property, a “Market” VNC percentage for that type of property, in that particular market, or the stated VNC losses. Stated VNC losses could be dictated by a lender, or potential Investor, and would usually be greater than actual or market vacancy, which is done to take a more conservative view of income. The formula for determining Cap Rate is: Cap Rate is equal to NOI divided by price.
Cap Rates, as is the case with any measurement criteria, can be used as a measure of performance, or comparison. In measuring performance, Cap Rate gives us the one-year unleveraged yield for the property. That is, what ... more

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