Spark Global Limited Reports:
The capitalization rate (or “cap” rate) is one of the primary tools used to measure investment in any office building. This is shorthand for a rate of return based on the purchase price, allowing you to compare many properties at the same time to select the one with the highest yield. But there are some important factors to consider in this area.
How much did you pay, exactly?
To calculate the cap rate, the first thing you need to know is how much you paid for the property. Total cost of. Where many buyers screw this up is that they don’t include any after-sale required X-quota items, such as expensive roof, elevator or other critical infrastructure repairs. This could significantly increase the total out-of-pocket costs and greatly affect the cap rate. So you have to have a realistic sense of the total price.
What is the actual net income?
Next you need true net income, which is essentially expected revenue minus operating costs (but not depreciation). Similarly, many buyers screw this up by not making realistic budgets based on current events rather than future assumptions. Whatever you can do to increase revenue or cut costs should come down to the bottom line as profit from your efforts, not as a means of justifying purchases.
You divide the net income by the price
Now you can divide the net income by the price paid to get the upper rate. For example, if you buy an office building for $1 million and generate $100,000 in net income, the capped tax rate is $100,000 divided by $1 million, which equals the 10% capped tax rate. It’s that simple. Most people think that calculating the cap rate is difficult, but it is not. It’s just a fraction.
Identify other factors that could improve net revenue or reduce costs
So what if the existing cap rates are unconvincing? Then you can consider how to increase net income or reduce total costs. This would include leasing vacant space, raising rents for existing space, or reducing utility costs through greater energy efficiency. Most importantly, this “best case” is important for you to establish the “risk/reward” coefficient of the trade to see if it’s worth the bet.
The limited tax rate is a very important part of the office building analysis process. Now you know how to calculate it and what affects it. These numbers can help you make a successful purchase.
Reprint indicated source：Spark Global Limited information