what is cap rate?

In Buying Property - Asked by Vicky G. - Sep 24, 2009
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Answer(s)

Tracy M.
Broker/Agent
Albany, NY

A basic indicator of whether a potential investment warrants a closer look...the cap rate is equal to the net operating income divided by the price. Acceptable cap rates vary by the type of property and the location.

Sep 24, 2009
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Nelson A.
Owner/Investor
Bronx, NY

Capitalization rate is basically your return on investment based on the price you paid for the property!

Sep 24, 2009
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Russ M.
Owner/Investor
diamond bar, CA

cap rate (i believe) is the annual gross return on investment.

Sep 24, 2009
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Rick G.
Owner/Investor
Gilbert, AZ

Cap rate is Net Operation Income (NOI) divided by the Purchase price x 100
so a $500,000 property that nets $50,000/year = 10% cap rate. It represents the return on your investment without considering debt service.

Sep 24, 2009
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David R.
Owner/Investor
Poway, CA

It is the inverse of PE ratio used by stocks. Instead of P divided by earnings, its net income (aka earnings) divided by price.

Sep 28, 2009
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Thomas M.
Broker/Agent
Upland, CA

I caution you to not consider this a return on investment. The CAP rate does not calculate your return compared to the financial investment. As Tracy M of NY says, it is an indicator, in this case a percentage, to compare/measure the value of the investment. The higher the CAP rate, the better value to the buyer. Calculate the annual NOI (without mortgage/debt service) divided by the price or value of the center. The cash-on-cash calculation percentage represents more of a retrun on investment, but would still need to add in depreciation and tax effects to get a true return on investment.

Sep 28, 2009
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Alex H.
Owner/Investor
Plano, TX

If you're familiar with the stock market, it is similar to the P/E ratio.

Oct 4, 2009
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Thomas S.
Broker/Agent
Chino Hills, CA

A way to determin the risk associated with an investment. The higher the cap rate the more risk involved. The lower the cap rate the less risk involved.

Oct 12, 2009
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Gregory G.
Broker/Agent
San Francisco, CA

Stands for capitalization rate and moves in the opposite direction of the interest rate:
CAP = NOI/PRICE
NOI is net operating income.
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Gregory Garver - Commercial Real Estate Broker
Broker License# 01716531
(415)225-9894
gregory.garver@gmail.com

Oct 23, 2009
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