By Altus Group | November 11, 2020

Video: What is a Cap Rate?

ARGUS Training Manager – Americas, Jessica Leal, shares in detail what a cap rate is, and the function of a cap rate in the valuation of commercial real estate properties. Watch the video or read the entire transcript below.

 

 

“What is a Cap Rate,” Transcript

Hello, everyone. My name is Jessica Leal and I’m the training manager over our Americas region. And today we’re going to talk about cap rates. Now cap rate is a shortened term for capitalization rates.

And this video is going to go hand-in-hand with our What is a Cap Rate? insights article. Now the article discusses when to use cap rates and it discusses really what a cap rate is and it’s described as a measure of the return on a real estate investment.

So what we’re going to do today is we’re actually going to talk about cap rates in ARGUS Enterprise (AE). So I’m going to go ahead and navigate over to AE and you’re actually going to see cap rates in two different places within ARGUS Enterprise and both of those are going to be found in the valuation parent tab.

So, if I go to that valuation parent tab and I go to that direct capitalization sub tab. We will actually see our direct cap rate. And you can see that ours is set to 8% and this particular property. Now the formula that ARGUS Enterprise uses is it takes the net operating income from year one.

It divides it by 8% and it gives us our direct cap value or the market value for this particular property. Now our direct cap value can actually be used in other tabs within AE. And so if I navigate right on over to that investment parent time I can actually use the direct cash value as my property purchase price.

And so that is actually the first place we’re going to see our cap rate utilized in ARGUS Enterprise. However, this is not the only place that we see a cap rate used if we navigate to our property resale tab, which is the very next sub tab. When modeling our resale calculation.

We also have the ability to enter in a cap rate. And so if you take a look, we can see that we have another field where we enter in the cap rate. And we have a similar calculation that we just saw in the previous tab. However rather than using year one’s NOI, we’re using the NOI 12 months after a sale.

So, for instance, if we were running a five-year analysis, we’re going to be using year six’s NOI. And if we take a look to the right, it will actually show us the formula. And so, we could see our NOI but this time, of course, it’s not using year one’s NOI. It is using the NOI 12 months after sale as we’ve chosen that calc method. It is dividing it by our cap rate very similar to what we saw in our direct capitalization tab.

It will subtract out any selling cost. And then we can see it produces that net sale price. And those are really the two different places within ARGUS Enterprise that we see our cap rates being used and that is actually it for insights video today.
We do hope that you enjoyed it.

Remember if you have any questions or would like any additional training over any topics that we cover, please feel free to reach out to us.

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