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Four Kinds of Cap Rates

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A new essay is up at NetGain Real Estate. It tackles the question of cap rates and how companies calculate them.

Recently I had a conversation with the manager of a large pension fund. He proudly announced that he had purchased a trophy piece of real estate in a prime location at a six-plus capitalization rate. I congratulated him, and then I asked, “On what basis was the capitalization rate computed?” He returned my question with a blank stare.

The purchase was large, involving a great deal of money, and the key to determining the purchase price was the capitalization rate. Yet this pension fund manager didn't know the assumptions behind his six-plus capitalization rate.

His stare went from blank to worried when I told him that the same property could have four or more capitalization rates. They are all valid; it just depends on the retirement program's needs and financial objectives to determine which is appropriate to use.

Read the full essay.

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Elaine Misonzhnik

Senior associate editor Elaine Misonzhnik has been writing for National Real Estate Investor since June 2006 and has covered commercial real estate for more than 12 years. She first became...
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