![]() ![]() ![]() Excluding the fees produces a higher rate that reflects the increased risk from the lack of professional management. For example, if one party takes account of management company fees in computing the NOI, and the other doesn't, they will arrive at different cap rates. Obviously, then, application of a cap rate that is too high to the subject property will result in an underestimate of the property's value, and vice versa.ĭisputes over the proper cap rate to use when valuing a property can stem from different approaches to developing a cap rate from comparable properties, particularly when calculating the properties' NOI. ![]() A higher cap rate will therefore result in a lower property value, NOI being equal. The interrelationship of NOI, cap rate and property value means that a property's value can be determined using the NOI and the cap rate - property value equals the NOI divided by the cap rate. The cap rate is calculated by dividing the expected income (after fixed and variable costs, not including debt costs), or net operating income (NOI), by the total value of the property. It's used to estimate the potential return on an investment and quantify the risk related to actually attaining that return. Unfortunately, cap rates are often misunderstood and improperly derived, which can affect the accuracy of a property valuation.Ī property's capitalization rate represents its rate of return, based on the expected income generated by the property. Capitalization rates are a critical component when real estate investors are comparing different investment opportunities. ![]()
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