You have been provided he formal answer to cap rate. However, I believe there is a greater understanding that you may be want to know. In selling a property it is not only a fine thing to know the formal definition of cap rate usage, but the practical approach as well.
A cap rate analysis is extremely important. The rate achieved in property ownership is what should "sell" the property. This achievement is accomplished by careful attention to keeping rental income high and expenses low. (The computation of Net Operating Income of course is Adjusted Gross Income minus expenses.
For example a $1000 change in adjusted gross income will add $12,000 per year to NOI. If your NOI prior to this adjustment was $100,000 and your asking price was $2 million, Viola a 5% cap rate. Change the NOI to $112,000 and your cap rate with the same sales price becomes 5.6%. Perhaps will be the difference between a non-sale and a sale. Reduce you expenses by $12,000 per year at the same time and you will get twice as much benefit.
May 17, 2010