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Home  >  Commercial Mortgage Loan Center  >  Calculating a CAP Rate

 
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Calculating a CAP Rate for Commercial Real Estate Financing

When applying for a commercial real estate loan in is helpful to have an idea what the value of your commercial income producing property is. The following is the method of calculating a CAP rate.

Direct Capitalization (CAP) is a method used to convert a property's annual income, into an estimate of the property's  value.

Direct Capitalization Rate Calculation

The Direct Capitalization Rate (CAP Rate) is defined as follows:
 

Value =      Net Operating Income   
              Overall Capitalization Rate
 

For Example:

V = $3,913,043
NOI = 450,000
CAP Rate = .115

$3,913,043 = $450,000
                     .115

The CAP Rate in the above example is 11.5% (.115 X 100 = 11.5)

Other derivatives of the formula are as follows:

Net Operating Income = Overall Capitalization Rate X Value

Overall Capitalization Rate = Net Operating Income
                                                 Value        

The formula for calculating Net Operating Income is as follows:

Potential gross income (all figures are on a annual basis)

    Scheduled rent                            $xxxx
    Other income                              $xxxx

Total potential gross income                                        $xxxx
Vacancy and collection loss                                          -xxx

Effective gross income                                                $xxxx

Operating expenses

    Fixed                                           $xx
    Variable                                       $xx
    Replacement allowance                   $xx

Total operating expenses                                           -$xxxx

NET OPERATING INCOME                                             $XXXX

CommercialBanc uses this basic method of valuing a property when pre- qualifying a commercial loan request. When applying for a commercial real estate loan of apartment loan, please have income and expense information available.

To learn more about CommercialBanc's commercial real estate loan and apartment loan programs contact a commercial mortgage loan specialist at
1-844-359-6413.

This article is protected under the copyright laws of the United States (title 17 U.S. Code).
Any unauthorized use is strictly prohibited. If you would like to reprint this article for use on a commercial website, please contact CommercialBanc for more information.

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