When evaluating a property, especially one that would interest an investor, CAP (capitalization) rates are one method we use to help understand an investors' rate of return on their investment.  CAP rates are important because they can provide a look at the initial risk of a potential investment property. The formula puts a property's net operating income in relation to the potential purchase price. This value method is done by using the current income in place, or rental rates we have been seeing in the current market for like-kind properties for any vacancy related to the property. This rate of return is based on an all cash (pre-mortgage) purchase. Although these numbers may sound simple, they are determined by using several components. One component being the most important: rental rates. Rental rates ultimately determine your net operating income (NOI), which highlights your rate of return for an investment. It is important to know that the term of a lease play a huge role in the rate of return as well. The longer the lease term a tenant is willing to commit to, the less risk an investor undertakes, therefore, supporting a higher price for the asset. Other factors that affect the CAP rate can be location, the quality of the tenants, the type of property, the condition/age of the property, and current interest rates. When it comes to evaluating the CAP rate for a property, there is never a "one size fits all". Each building is unique and requires consideration of all these factors and more.                                                                          ~Luke Russell, Sales Agent