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South Africa - How to calculate a cap rate or yield for investment property - by Willem Tait



How to calculate a cap rate or yield for investment property


In the past month I have had a couple of brokers, agents, buyers and sellers asking me how to calculate the yield or cap rate of an investment property.

For the sake of this article, we will refer to a cap rate only.

Let us have a quick recap: CAP RATE -The cap rate or yield of a property is usually expressed in a % or a decimal i.e. 11% or 12.5% or expressed as an 11% cap rate or 12.5% cap rate.

-The cap rate always excludes the assumption or fact that the property is financed or owned with or without a bond

-The cap rate generally does not take into consideration the age or condition of the property. It is an expression of income vs. asking prices

-The higher the cap rate, the higher the risk and reward and therefore the price is lower -The lower the cap rate, the lower the risk and reward and therefore the price is higher.

A buyer may increase the cap rate from 12% to 12.5% seeing that the property may need to be painted in the next 6 months and that the new buyer would need to pay for same.

NET INCOME

The cap rate of a property is the expression of risk and return associated to the property and the calculation is:

NOI divided by the purchase price equals the yield or cap rate.

-NOI is the annual net operating income of the property i.e. all income minus all expenses.

-NOI is thus the sum of all income i.e. rental plus income from parking and any other income minus ALL expenses.

-NOI could therefore also be seen as the Gross income of the property minus all expenses.

-NOI always excludes VAT

-NOI is always an annual sum

Assuming a property is on the market for R10mil and generates a net income per month of R 100 000 and thus an annual net income i.e. NOI of R 1.2mil, the cap rate of the property would be 12%

Depending on the type property, expenses are usually qualified as: rates and taxes, security cost, maintenance budget, insurance etc.

Buyers are looking at acquiring investment property at between 10% and 13% and sellers are asking between 9% to 11%

You are welcome to visit the following link http://www.propx.co.za/investment_pro_commercial.htm for more information on investment property available via PropX.

Alternatively, welcome to contact Willem Tait, CEO for PropX on willem@propx.co.za


More about me

I am a Commercial Property broker in South Africa and Africa and work with local and international property professionals, brokers and agents in concluding property deals.

-been in the game for the past 15 years, leasing and selling commercial space and can also assist corporate tenants, buyers and sellers in finding, leasing and selling commercial property.

-absolutely enjoy working with other property brokers and property professionals on a commission split basis in concluding transactions.

Welcome to visit http://www.willemtait.com/ for more info on my company or email mewillem@propx.co.za