| How do I determine a capitalization rate? |
|
A "cap rate" is the rate by which you can capitalize or set a value for an income stream. If a property generates $100 in operating cash flow and you have determined that you would like to generate a return / capitalization rate of 10%, the value or price you might pay approximately equals $1,000 ($100 / 10%). The more stable the income stream, the lower "cap rate" you are willing to accept, and vice versa. Here are some rough guidelines for you:
| Risk / Quality |
Residential Property
(Single: 1 unit) |
Residential Property
(Multiple: 2-4 units) |
Apartment Complex |
Commercial |
| High Risk |
14% |
12% |
11% |
12% |
| Medium Risk |
12% |
11% |
10% |
11% |
| Low Risk |
10% |
9% |
8% |
10% |
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