What is the Cap Rate and how is it determined ?

In Selling Property - Asked by Don C. - Jun 8, 2015
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Answer(s)

Edward G C.
Broker/Agent
Los Angeles, CA

It is the return on your investment assuming you purchase the property all cash. Its calculated by dividing the Net Operating Income by the Purchase Price.

Jun 9, 2015
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Francis L.
Broker/Agent
Santa Clarita, CA

It is the Net Operating Income divided by the asking price or the purchase price. For example: If the NOI is $100K and the asking price is $2 MIL, the Cap Rate is $100K divided by $2MIL, which is a Cap Rate of 5%.

Jun 11, 2015
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James G.
Broker/Agent
Tampa, FL

The cap rate is the net operating income divided by the purchase price of the property. Similarly, if you are trying to determine a potential sale price, you can divide the net operating income by a cap rate (determined by the cap rate of recent sales comparables).
Keep in mind that people arrive at net operating income in many different ways, which can skew the true cap rate. Some underwrite using today's expenses with tomorrow's income; others use tomorrow's expenses with today's income; some do not include a management fee, reserves, vacancy factor, etc. These variables in net operating income can drastically change the cap rate. I would recommend underwriting to lender standards in order to get a true picture of what the cap rate will be.

Jun 26, 2015
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Carlos R.
Listing Administrator
Miami, FL

There are five steps in the income-capitalization approach to value:

1. Estimate potential gross income (PGI)
2. Estimate and subtract vacancy & collection losses (V&C) to
get effective gross income (EGI) 1
3. Estimate and subtract operating expenses to get net operating
income (NOI)
4. Estimate a capitalization rate
5. Apply the IRV formula to get value (income div. by rate = value)

Jul 1, 2015
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