# how do you calculate CAP?

In Buying Property - Asked by lillian m. - Apr 28, 2009

William m.
Broker/Agent

Here's How:
1.Get the recent sold price of an income property, such as an apartment complex.
Example: Six unit apartment project sold for \$300,000
2.For that same apartment project, determine the net operating income, or the net rentals realized by the owners.
Example: The rental income after expenses (net) is \$24,000
3.Divide the net operating income by the sale price to get cap rate.
Example: \$24,000 / \$300,000 = .08 or 8% (The Capitalization Rate)

Apr 28, 2009
Eric W.
Broker/Agent

Net Operating Income divided by price.
For apartments we use NOI after Reserves.

Apr 29, 2009
Paul S.
Broker/Agent
Glendora, CA

Cap is merely the relationship of the price to the net income. It does not include debt. Cap only looks at a 1 year window. The formula is NOI/Price=Cap. View the cap as the one year rate of return if you paid all cash for a property. The biggest mistake people make with cap rates is they make more out of them than they really are. They are usefull in comparing other properties but remember they only look at 1 year. What happens to an investment if the caps rise over the next 5 years? What if the cash flows vary? What does vacancy do? There are hundreds of variables that can change the value of the investment. Internal rate of return (IRR) on the other hand can take into account all the variables you want for as many years as you want. If you would like more information please call me at 626 485-5163 or paulsylvester@remax.net
Paul Sylvester, CCIM

Apr 29, 2009
Tai L.
Broker/Agent
San Diego, CA

(Gross Income-Total Operating Expenses)/Sales Price

May 22, 2009