Expert: Peter Liebert, SIOR - 3/25/2005

Question
Generally, how does one calculate a "cap rate," and how concerned about it should I be if I'm investing in commercial real estate (retail) that generates sufficient cash flow to pay for itself?  I'm fortunate enough that I don't need the additional current income, but I'm buying for retirement income.

Answer
Rex, cap rates vary market to market and also are keyed to the credit rating of the tenant. A building leased by a "B" credit tenant may warrant a cap rate of 8.5% (net income divided by the price of the building). BUT you must also take into consideration whether the Lessor is responsible for roof repairs, parking/driveway maintenance, landscaping, etc. How "net" the lease is must be considered as to what your actual net income is. Unless the tenant is strong, a vacancy factor should be included for a 15 or 20 year (or however long) holding period for the property. Like a book, know the purchase price and date, and the end date at which to sell it. Contact a Society of Industrial and Office Realtors member in your area. SIOR.com has a directory. I am in the Philadelphia, PA Chapter. / Peter