Cap Rates and Valuation: How Commercial Property Is Priced
The capitalization rate is the shorthand investors use to compare income properties. One number connects a building’s income to its price, and misreading it costs real money on both sides of a deal. Here is how cap rates work, what moves them, and how they translate into what your property is worth.
The Cap Rate Formula
Cap rate equals net operating income divided by price. Simple math, three ways to use it.
Finding the Cap Rate
A building producing $100,000 of net operating income priced at $1,250,000 trades at an 8% cap rate. That is the return the property’s income would produce if you paid cash.
Finding the Value
Flip the formula: NOI divided by the market cap rate estimates value. The same $100,000 of NOI at a 7% cap rate implies roughly $1,430,000. This is how most income property gets priced.
Comparing Deals
Two listings with different incomes and prices are hard to compare directly. Their cap rates put them on one scale, which is why brokers, lenders, and appraisers all quote them.
What Moves a Cap Rate
Cap rates are risk pricing. The more certain the income, the lower the rate a buyer will accept.
Tenant Credit and Lease Term
A national tenant on a 15 year lease trades at a lower cap rate than local tenants on short terms. The income is more certain, so buyers pay more for each dollar of it.
Location and Submarket
The same building trades differently in Buckhead than on a secondary corridor. Submarket vacancy, rent growth, and buyer demand all price into the rate.
Property Condition
Deferred maintenance raises cap rates because buyers price in the capital they will have to spend. A new roof does not add income, but it protects the price.
Interest Rates
Cap rates track the cost of debt over time. When borrowing costs rise, buyers need more income per dollar of price, and cap rates drift up with them.
What Cap Rates Miss
The cap rate is a snapshot, not an underwrite. It ignores several things that change your actual return.
Financing
The cap rate assumes an all-cash purchase. Your actual cash-on-cash return depends on loan terms the cap rate never sees.
Capital Expenditures
Roofs, parking lots, and HVAC replacements sit below the NOI line. Two buildings at the same cap rate with different capex needs are not the same deal.
Lease Rollover
A strong cap rate on income that expires next year is a mirage. Check the rent roll’s expiration schedule before trusting the rate.
Below Market or Above Market Rents
In-place income can understate or overstate what the building will earn. Buyers underwrite market rents, and sellers should know the gap before pricing.
The Quality of the NOI
A cap rate is only as honest as the NOI behind it. Overstated income and missing expenses are the oldest tricks in the offering memorandum.
Why Work with Randy Suh on Pricing
Published cap rate averages are national and stale. Pricing a real building takes comps from the same submarket, the same property type, and the last few months.
Here is what Randy brings to a valuation:
- Live Atlanta comps: what similar buildings actually sold for, not asking prices.
- A rebuilt NOI: your income and expenses restated the way a buyer will underwrite them.
- A defensible price: a broker opinion of value with the comps and math shown, not a number pulled from a formula.
- Both directions: pricing for sellers, and cap rate sanity checks for buyers before an offer goes out.
- Bull Realty’s market data: intelligence across metro Atlanta’s office, retail, and industrial submarkets.
A broker opinion of value is free, and it answers the question this whole page circles: what would your property actually trade for today?
Want a Real Number for Your Property?
Formulas get you an estimate. Comps and current buyer behavior get you a price. Request a free broker opinion of value and see what your building’s income supports in today’s market.
Contact Randy today to get started. Reach him directly at Randy@BullRealty.com or call 404-876-1640 x143.
Randy Suh 