what is cap rate

In Buying Property - Asked by guillermo c. - Dec 30, 2013
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Answer(s)

Anthony Y.
Owner/Investor
Apollo Beach, FL

Cap rate is short for Capitalization Rate. It is the return expected assuming an all cash purchase. Mortgage costs are not taken into account in a cap rate calculation. In mathematical terms this is the Net Operating Income (NOI) divided by the purchase price. This gives you an idea of how the investment compares to other potential uses of your capital (i.e. bonds, stocks, CD's, etc.) Here is an example:
You purchase an apartment complex for $1M. The property has a gross annual income of $150K and annual expenes of $60K. This would give you an NOI of $90K ($150K - $60K). To get the cap rate you would then divide the NOI by the purchase price ($90,000/$1,000,000) which gives you 9%. If the prevailing cap rate in your area is 6% for comparable properties, this would be a good value. It is certainly returning better than treasuries and CD's.
Do not confuse cap rate with the actual return on your capital invested. You will need to calculate cash-on-cash return for that. An excellent book on understanding key financial measures in real estate is What Every Real Estate Investor Needs to Know about Cash Flow... And 36 Other Key Financial Measures by Frank Gallinelli. He explains things in a very basic way that doesn't require a degree in finance to understand. Hope this helps.

Dec 30, 2013
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Frederick F.
Broker/Agent
Santa Rosa, CA

Real estate investors rely upon a variety of information when negotiating or purchasing income producing properties. The investor utilizes all available information about the property from the desirability of its current location to prospective changes in the neighborhood when evaluating the investment potential of a property. One main source of information is called the capitalization rate or cap rate. A cap rate is useful in determining the maximum amount that an investor should spend given the annual return that investor plans to make. The cap rate allows investors to compare properties by evaluating a rate of return on the investment made in the property. The cap rate allows investors to compare properties even though those properties have different net income and purchase prices. Since the information is so useful in making across the board comparisons on income properties, it is very important that investors know how to figure the cap rate of property investments.

Dec 30, 2013
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Tony K.
Broker/Agent
Los Angeles, CA

A Capitalization Rate is an Investor Required Rate of Return prior to loan payment or debt service.
Net Operating Income/Capitalization Rate = Overall Commercial Real Estate Price or Value
Many factors go into a Cap Rate: General/specific location, general property type/specific uses, age/quality condition of improvements.
A True Actual Capitalization Rate at 100% occupancy by tenants consists of all market level & submarket derived: FMV - Fair Market Rent vs. existing Contract Rent in place less deductions for Vacancy & Collection Loss, Expenses which equals Net Operating Income.
Main items which build up the Cap Rate: Is Contract Rent Below, At or Above Market Rent Levels, Credit of Tenants - National, Regional or Local & # of months remaining on leases.

Dec 31, 2013
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Tony H.
Broker/Agent
Chicago, IL

Solid explination of cap rate at the link below, Thank you

Jan 2, 2014
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Caren K.
Broker/Agent
Jersey City, NJ

Cap rate is calculated as , dividing the net operating income by the sale price.
Example: $20,000 / $200,000 =.01 or 10% (The Capitalization Rate)

Jan 3, 2014
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Shelby W.
Owner/Investor
Renton, WA

Capitalization rate (or "cap rate") is the ratio between the net operating income produced by an asset and its capital cost (the original price paid to buy the asset) or alternatively its current market value.

Jan 3, 2014
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Josefina S.
Broker/Agent
Vista, CA

39,200

Jan 3, 2014
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Newcastle T.
Broker/Agent
Oak Brook, IL

CAP RATE Capitalization Rate is simply the net operating income (NOI) of the investment property divided by the selling price. For example, a multi-family property has a NOI of $100,000 per year. If an investor wants to pay no more than 7.0% cap rate he would pay $1,428,571 ($100,000/.07).
If you are a stock market investor, you may be familiar with the P/E ratio of a stock. This is the price/earnings ratio or capitalization rate…the same principle. A stock selling for $20.00/share and it has earnings per share (EPS) of $2.00/share, then it has a P/E ratio of 10 or a capitalization rate of 10.0%.
CASH ON CASH RETURN
This is a term (just like CAP rate) that is widely used by real estate investors. This is the amount of cash (either pre-tax or after-tax) that is generated by an investment property divided by the amount of cash you have invested in the property. Most investors will ask you what the cash-on-cash return is or what the cap rate is. For example, the net cash you have invested in a property is $80,000 ($100,000 down payment less $20,000 of seller credits at closing) and the cash generated by this property, after-tax, is $15,000. Your after-tax cash-on-cash return is 18.75% ($15,000/$80,000).
Paul Martis-Broker/Agent
Oak Brook, IL.

Jan 6, 2014
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Gary O.
Lender/Mortgage Broker
Fort Pierce, FL

As a retired state certified general appraiser we regularly considered the cap rates or capitalization rates relating to the purchase price and value of income producing real estate property. The final net operating income divided by the sales price equates to the going in cap rate for the subject property. Cap rates can also include additional risk elements such as a built up rate analysis which is sometimes used when sufficient data to estimate a cap rate is inconclusive.

Feb 28, 2014
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Eric S.
Broker/Agent
Brooklyn, NY

NOI / Sale price = Cap Rate

Mar 3, 2014
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Bo G.
Broker/Agent
Birmingham, AL

NOI (Net Operating Income) / Sale Price = Cap Rate
for example an apartment complex's NOI is $10,000.00. The sale price is $120,000.00. it would be an 8 CAP.

Mar 5, 2014
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