A cap rate, or capitalization rate, is a metric used to measure the rate of return on a real estate investment. It is calculated by dividing the net operating income (NOI) from the property by the current market value of the property. The cap rate is used to determine the potential rate of return for an investor, and is often used as a measure of a property’s risk.
Generally speaking, a good cap rate for commercial real estate is one that is higher than the average cap rate for the local market. This is because investors should be looking for properties that offer higher returns than the average in order to maximize their potential return on investment. However, the cap rate alone should not be used as the sole measure of a property’s potential return, as other factors such as location, tenant mix, and market conditions can also play a role.
The cap rate for a given property will vary depending on the local market and the specifics of the investment. For example, a higher cap rate may be expected for properties in more desirable locations or with tenants who have longer leases. Conversely, properties in less desirable locations or with shorter leases may have lower cap rates. In summary, a good cap rate for commercial real estate depends on the local market and the specifics of the investment.
Generally speaking, investors should be looking for properties that offer returns higher than the average cap rate for the local market in order to maximize their potential return on investment.
