What is cap rate?

In Buying Property - Asked by Pernie F. - Sep 10, 2013

John S.
Broker/Agent
Belleair Bluffs, FL

The term "cap rate" stands for capitalization rate.
To figure the cap rate, take the net operating income (NOI) and divide by the sale price.
So a property with \$75,000 net income, which sold for \$850,000 would have an 8.82% cap rate.
(75,000 / 850,000 = .0882 or 8.82%)
I hope this helps.

Sep 10, 2013
Jay S.
Broker/Agent
Norfolk, VA

It's the relationship between the net operating income and the asking price of an income producing property, an all cash rule of thumb return on your money (going in yield), and a cap rate is derived by analyzing the market and the risk associated with the investment. The higher the cap generally the more risk associated. The lower the cap, the lower the return but less risk involved. Feel free to email me with more questions. Hope this helps.

Sep 10, 2013
Gregory G.
Broker/Agent
San Francisco, CA

CAP rate is calculated by dividing the net income by the sales price.
NOI / Price = CAP

Sep 10, 2013
Caren K.
Broker/Agent
Jersey City, NJ

The capitalization rate is used to estimate the investor's potential return on his or her investment. For calculating it manually , divide Yearly Income by Total Value.
\$26,000 / \$340,000 = .07 or 7% (The Capitalization Rate)

Oct 14, 2013
Glen W.
Lender/Mortgage Broker
Atlanta, GA

The answers below are correct. Fundamentally cap rate is the return that a reasonable investor requires on an investment. It works in Inverse. A higher cap rate signifies more risk to the owner. For example a Walgreens NNN lease would have a much lower cap rate (which in turn leads to a higher valuation) than a start-up dog washing facility (a much higher cap rate and therefore a much lower property value). I hope this helps

Apr 1, 2014