For those who are investing in commercial real estate or want to invest in commercial properties, it is important to focus on the capitalization rate, or cap rate. The cap rate is the ratio of the rental income that is made each year over the cost of the purchase price of the commercial real estate.
If the cap rate is higher than the income that is brought in from renting out the property, the the commercial property brings in more and a smaller amount of down payment is required. Capitalization rate is often focused on to help determine properties that bring in a small rental income.
Yet other commercial real estate investors want real estate where the cap rate is higher than the loan’s interest rate as they focus on getting more in rental income than what they have to pay on the mortgage.
Having stated this, is a high cap rate the best way to determine the best property to invest in? The answer is a definite no. Cap rate is just one factor to consider amongst many factors and it should not be the only factor.