Cap Rate

[Simon Cox]

Hey everyone,
I'm having a bit of trouble determining the proper use of a commercial property's cap rate.

I know the basic calculations that describe where it comes from but my question is with how do you decide what cap rate to use in calculating fair market value? Answer(?): from comparable properties, but what if there aren't any? 

When finding the average cap rate for an area, do you use the cap rates that go along with the asking price?

Any other insight on the topic would be greatly appreciated. 
Like I said, I get the main idea but am having trouble putting the rubber to the road on how it is actually used.

Thanks everyone!

[Luc Boiron]

@Simon Cox Often, where it would be easy to increase rents, you would purchase at a slightly lower cap (higher price). So instead of paying a 10% cap on a property that generates $10,000 a month, you might pay a 9.5% cap on a property that generates $9,000 a month, knowing that you can bring it up to $10,000.

10 cap on $10,000 is $100,000.

9.5 cap on $9,000 is $94,737.

In the second situation you are paying more per dollar for the current income, but it may (and should) actually be less than you would pay if rents were at market.