Property Valuation
What is a 'capitalization rate' (cap rate) and how is it used in Nevada commercial real estate?
ACap rate = Monthly Rent × 12 ÷ Mortgage Balance
BCap rate = Net Operating Income ÷ Property Value; it reflects the expected rate of return on an income property and is used to estimate value or compare investment opportunities✓ Correct
CCap rate = Property Value ÷ Annual Gross Income
DCap rate is only used by Nevada commercial banks, not real estate agents
Explanation
Cap rate = NOI ÷ Value, or rearranged: Value = NOI ÷ Cap Rate. If a Las Vegas apartment building generates $150,000 NOI and comparable properties trade at a 5% cap rate, value = $150,000 ÷ 0.05 = $3,000,000. Lower cap rates indicate higher values (lower risk, premium markets). Nevada commercial real estate professionals use cap rates to quickly compare and value income properties.
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