All Forum Posts by: Patrick Gerrity

@Patrick Gerrity Generally with commercial properties the value is the NOI divided by the average cap rate for that type of property within the local market. You may want to talk to local realtors and brokers to get an idea for what the local cap rate is.

The building sounds great, but it also sounds like there is not much opportunity for forced appreciation.  That means you will probably get your money back at the average cap rate and not sooner.

@Patrick Gerrity The cap rate is another way of saying how much will the market pay for a $ of (unleveraged) returns. Therefore, if an investor pays $10 for every every $1 of earnings, it is a 10% cap rate. But another investor can value the same cash stream differently. 

For example, an elderly couple might be willing to pay more because they feel that the "quality of cash flow" (consistency) is more predictable. Thus, it is a better fit for their needs. Hence, they might be willing to pay more for the same stream of cash flows. They might pay $15 for the same $1 of cash flow or a cap rate of 6.67%.

Initially, it can be confusing understanding this inverse relationship. But the framework above might help you to view it from a different perspective. Hope this helps!

If the cap rate is 10%, for example, the building's value is $1.335 million.  If its 5%, the building's value is $2.67 million.