Understanding Cap Rates
Cap rates are a measure of a property’s investment potential, independent of the specific buyer.
Investors, lenders, and appraisers use Reis to estimate the appropriate purchase price for different types of income producing properties.
To give our clients a complete picture of the income value of a specific property Reis evaluates three cap rates in our proformas, which are included in our sales comps, and can be seen in the example above.
- Estimated Going-In Cap Rate - An overall capitalization rate obtained by dividing the projected net operating income for the first full calendar year of ownership by the purchase price
- 12-Month Rolling Cap Rate - The calculated from the average of the metro’s mean cap rate from the previous four quarters and provides a benchmark rate of comparison
- Reported Cap Rate - This is reported directly by the buyer, seller or other party to the transaction, and is calculated by dividing reported net operating income by the purchase price
By providing transparency in our calculations we enable clients to accurately quantify cash flows and estimate the potential return on investment (ROI).
Cap Rate Analysis Proforma
Reis provides an analysis which projects income and expenses one year forward from the point of sale. Clients can customize the Microsoft Excel version of the proforma calculation.
Metro Cap Rate Trends
Reis’s historical database provides a complete view of metro cap rate trends, providing a clear top down understanding of the investment potential of your property. Understanding the historical performance of the metro is critical to assessing the potential ROI.