Cap rates for commercial space

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CAP Rates for Commercial Space
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• Capitalization rates, or CAP rates, are analyzed
  to provide both a buyer and a seller with some
  basic information on how commercial real estate
  value is based on the interest income that is
  generated by the property per year relative to
  the net investment.

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• Although these valuations are only an estimate
  and may fluctuate from day-to-day based on real
  estate stocks, there is seldom a factor that is
  as debatable as the CAP rate when deciding to buy
  or sell commercial real estate.

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Factors to Consider

• One may wonder if CAP rates are a good way to
  assess commercial spaces and Business Centre in
  Chennai. They may very well play a role in this
  assessment however, the following factors should
  be carefully considered to achieve reliable
  results.

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Point of Reference

• CAP calculations are valued against a benchmark
  of ten percent. Although it is feasible this to
  method of calculation to be used as a shortcut,
  the use of a generalized capitalization amount
  should be avoided.

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• When it comes to the net worth of real estate,
  any minor fluctuation could lead to significant
  errors when making this calculation which could
  have huge monetary repercussions.

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• As tedious as it may seem, rather than
  determining the approximate value of a certain
  property, it is much more advisable to thoroughly
  perform all calculations and then settle a
  representative value. It also applies for all Off
  Shore Development Center in Chennai also.

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Approximations

• Many times, the data that is provided is an
  approximation. For commercial holdings, the
  monetary aspects of the property such as total
  income generation per year

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• percentage of vacancies total amount of yearly
  expenses and NOI sheets should never be an
  estimate these figures should be exact.

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• When considering the purchase of a commercial
  property, a buyer should not be satisfied when
  the language that is used to describe the
  financial aspects of the property is in the form
  of estimation, such as an income of "around"
  5,000,000.00,

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• with a vacancy range of "approximately" six
  percent and an income-expense ratio of "about"
  thirty percent.Buyers should steer clear of real
  estate where the sellers are unwilling to provide
  exact figures for appraisal purposes.

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CAP Rate Components

• While these rates do include some valuable data,
  they do not account for the business value
  portion of commercial holdings. When both the
  real estate and business price of a property is
  placed up against the real estate price of the
  property alone, the results may vary.

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• Therefore, the income and expenditures in terms
  of the real estate itself as well as the actual
  needs of the business must be determined in order
  to evaluate the true worth of the property,
  something that the CAP fails to do.

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Historical Projections

• The capitalization rate symbolizes monetary
  returns for investments for the coming financial
  year however, these predictions are based on
  historical data which has been computed with the
  past financial year in mind.

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• This system is flawed and provides inconsistent
  and changing monetary patterns. For instance, the
  CAP rate chart does not account for any sudden
  variations in the real estate or stock market.
  The fact that these rates depend on the previous
  years' calculations to provide for the future has
  the possibility of causing huge problems down the
  road.

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Confusing Figures

• CAP returns can be confusing and are based on
  charts that determine the equity returns for a
  range of initial investments and amounts. For
  instance, an investor who spends 475,000.00 for
  a commercial holding can expect to receive equity
  ranging anywhere from 7.4 percent to 24.8
  percent, depending on capitalization rates over a
  twenty-five year period.

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• Therefore, investors have no sure bankable assets
  with which to determine the worth of the property
  at a given period in time and must always
  "assume" the average.
• CAP rates can be a very deceptive means of
  determining the value of a property.

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• Buyers might determine that properties with low
  capitalization rates are much more profitable in
  comparison to those with high ones in fact,
  these amounts may change from year to year.

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• As a final word, it is not a good idea for buyers
  to completely base a decision on whether to
  purchase a certain Commercial Space for Rent in
  Chennai based on the CAP value alone!

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Thank You !