Valuation Method, Capitalisation Rate, part 2/3

Capitalisation Rate %


Once again the following is a simple example and the illustration is only to recognise different versions of valuations, ALWAYS seek professional advise.

This method is more than likely the most common and preferred method in relation to
commercial real estate. Licensed valuers will apply this method to a particular property to
determine the Capital value.

The Capitalisation rate will fluctuate accordingly to market forces, as the market moves so will the Capitalisation rate. This is usually determined by the markets appetite for investment properties. The return on Capital is usually greater when you invest with commercial property compared to residential property.

Note : The higher the return, the higher the risk.

There are many complex issues associated with commercial properties as they are most usually sold with a lease – tenant in place, these leases can determine the value of the subject property, they can also be sold as vacant possession. Licensed valuers are required for professional market values as the lending financial body will require a good understanding of the risk associated with the loan.
The Capitalisation rate is described as a % net return on Capital invested.
Examples only:
Property       Sale Price       Net Return     Cap Rate / Yield 

1 John St        $1,000,000      $ 72, 500       7.25 %
3 Smith St       $1,300,000      $ 69, 400       5.34 %
8 Tudor St       $   950,000      $ 57, 000       6.00 %
The above figures have been rounded off for illustration only.

Once again we do not except any responsibility for the above examples and urge people to seek professional advise if required. The above information has been illustrated for simple explanation only regarding the most common methods of valuing real estate.

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