# what does CAP RATE mean ?

Just wondering what CAP RATE means and a good easy explaination
thanks
In Buying Property - Asked by job v. - Dec 1, 2008

Juan G.
Broker/Agent
Ontario, CA

Rate of Capitalization, the percentage of net return that you recieve from your investment. Example is you invest \$100,000, every year you gross \$14,000 but it costs you \$4,000 in operating expenses, so you actually net \$10,000. In this example you have a 10% cap rate. To price a building you do the following; NOI (net operating income) and divide that by the market cap rate for the property type in the market (i.e 4%). Example; [gross rents@\$17,000 - operating expenses@\$2,000/ 7% cap = \$214,285.71. Mathematically to reprhase the previous example [17,000-2,000]/.07 = 214.285.71. Obviously there is much more to this so I would suggest you either speak one on one to a professional or take some courses with CCIM or ULI.

Dec 1, 2008
Susan M.
Broker/Agent
Palo Alto, CA

Simply: the cap rate is always expressed as a percentage of what you net (NetOperatingIncome=made/make) on the property divided by the price (what you paid/pay for the property).
You net \$36,000 year; you paid \$900,000: your cap rate is 4%
(Which is excellent, by the way - in this market anything under 12% is good! Even in a boom market, 6% - 8% is really healthy!)
Your eval needs to look at rents, additional revenue, expenses including taxes/insurance, what MAY BE a major expense, i.e. roof, plumbing, structural, and of course, depreciation.
Obviously, the location, type of property, leases, capitalization etc., play heavily in modifying the cap rate based on time, building health and investor risk tolerance.

Dec 1, 2008
Gina M.
Broker/Agent
Detroit, MI

NOI/Purchase Price.

Dec 2, 2008
Glen W.
Lender/Mortgage Broker
Atlanta, GA

Cap rate is the rate of return a reasonable investor would require from their investment. Currently cap rates are rising because people are demanding higher rates of return for their investment. Cap rate and value move in an inverse; the higher the cap rate, the lower the value of the property. http://www.fairviewlending.com/underwriting.htm#40 provides more detailed information. Below is also a link to a blog I wrote regarding the increases in cap rates.

Dec 3, 2008