The capitalization rate is one of the most discussed topics for investors in commercial real estate in Windsor and Essex County and beyond. For those who aren’t familiar with capitalization rate, it is the rate of return on your real estate investment property determined by the income that the property is anticipated to generate for you. The capitalization rate is used as a guide to help investors estimate how much of a return they can expect on their real estate investment.

While there are many factors that can ultimately change the return on investment for a property, the capitalization rate is used as a general way of determining how much of a return you can expect from your investment property. This rate can be calculated by taking the annual income that is expected to be generated from your property, subtracting the operating expenses associated with it, and dividing that by the current market value of the investment property. The number this calculation gives you is the percentage capitalization rate (commonly referred to as the “Cap Rate”).

Capitalization rates are meant to express, in quick and simple terms, the level of return an investor can expect on a particular real estate investment. The capitalization rate is the percentage of the property’s value that one can expect to generate as profit each year, and in order to have an accurate idea of what the capitalization rate is for a property, it must be re-evaluated with the current value of a property on a regular basis. Following the changes in this rate over time can give you an idea of how it is performing, and can help inform a decision about whether it would be a better decision to sell it or continue to generate the investment income.

The capitalization rate is most useful as a tool when analyzing long-term investments rather than shorter ones, and can help to illustrate the estimated amount of time it will take to recoup an investment. However, it is just one way of understanding the potential return on a piece of real estate and should not be used as the only measure of whether a property is worth investing in. At Royal LePage Binder Commercial, our experts can provide you with comprehensive information and advice about investing in commercial real estate in Windsor-Essex so you can make an informed decision, and will help you discover all of your options for property investing in the region. Contact Royal LePage Binder Commercial today to find out more and to speak with one of our professionals about your needs in commercial property investments in Windsor and Essex County, and let us walk you through the entire process from start to finish so you can make an educated decision on your next investment property.