WHAT IS CAP RATE

In Selling Property - Asked by Paul S. - Jul 8, 2010
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Answer(s)

Randy H.
Owner/Investor
Edmond, OK

i had the same question. This is what I found...

Jul 8, 2010
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Arnold K.
Broker/Agent
Lake Forest, CA

Net operating income divided by the price
If you buy the property for cash - no loan
it is the % cash return on your investment

Jul 8, 2010
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Joseph A.
Broker/Agent
College Point, NY

Capitalization rate (or "cap rate") is the ratio between the net operating income produced by an asset and its capital cost (the original price paid to buy the asset) or alternatively its current market value.

Jul 12, 2010
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Rob B.
Chandler, AZ

The two previous answers are fine. In addition, a real estate cap-rate is one way of measuring comparative value of different property investments, as well as measuring comparative value of competing cash investments.
Leverage plays a role after the application of the cap-rate to determine actual cash flow from one real estate property to another or from a leveraged real estate investment toward other leveraged investment opportunities.
Rob Baird (CA RE License #544165 - one of the oldest active RE licenses in CA)
951 515-5855

Jul 12, 2010
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Daniel D.
Owner/Investor
Las Vegas, NV

The capitalization rate is really the rate of return (ROI) on your investment. If you are selling an income property for $1 million dollars, and let us say that you are currently generating a net rental income of $100,00 per year from it, your cap rate (or ROI) is 10% ($100,00 is 10% of $1 million). When buying a commercial or multi-family property, investors look at the NOI (Net Operating Income) of the property to determine the viability of their purchase and what the rate of return on their investment would be. I hope this answer helps you. Take care.

Jul 12, 2010
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WC Equity G.
Owner/Investor
Tampa, FL

Paul,
Cap rate refers to a properties capitalization rate, or, the ratio between the net operating income produced by an asset and its price. For example, if you are buying a property for 100K, and bringing in 10K annually, your cap rate is 10%.
Typically, anything over 12% is considered excellent -- my investment firm specializes in the sale and promotion of real estate assets with cap rates up to 30%.
I hope this helps.

Jul 14, 2010
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David C.
Los Angeles, CA

Thank you for your question. The Cap Rate is a commonly used ratio. A ratio is a relationship between a balance sheet or income statement value.
It compares the annual income of a property by the net operating expenses to get the CAP Rate.
Use the Analyzer on my website to generate ratios for all your prospective commercial real estate purchases.

Jul 15, 2010
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Samer G.
STERLING HEIGHTS , MI

The cap rate (put simply) is the number expressed as a percentage used in connection with evaluating a deal.
With a typical calculator take your Net Operating Income and divise it by 9%.
If you are buying something that is netting $50,000 after all expenses including taxes BUT NOT your mortgage and you feel you are willing to place a 9 CAP value on this property then your value, or you are then willing to pay 555,555.56 for the property.
Cap rates can be very tricky because they lose their accuracy when the Net operating income is inaccurate. BE VERY CAREFUL and never judge a deal by what a broker tells you a cap rate is. You really need to see the real value by clearly understanding A. the income then B. the true expenses AND THEN and only THEN arriving at a NOI that you feel confortable with AND THEN applying your acceptable cap rate to the deal. NOTE: when you pay ALL CASH for a property your CASH ON CASH RETURN IS YOUR CAP RATE

Jul 15, 2010
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NATHAN B.
Broker/Agent
Ontario, CA

Check out the pitfalls of the common assumption of the "CAP" rate in the article below:

Jul 20, 2010
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WC Equity G.
Owner/Investor
Tampa, FL

Cap rate refers to a property's "capitalization rate," or net income derived from rental income divided by cost of property. Typical cap rates in this market are 5-9% -- exceptional cap rates are at 10-14%. My firm specializes in the buying and selling of investment properties with cap rates up to 30% -- unheard of.

Sep 6, 2010
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Jeremy C.
Broker/Agent
Andover, MA

The cap rate is a ratio relationship of the first year's net operating income divided by the purchase price.

Jul 10, 2011
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