The capitalization rate is really the rate of return (ROI) on your investment. If you are selling an income property for $1 million dollars, and let us say that you are currently generating a net rental income of $100,00 per year from it, your cap rate (or ROI) is 10% ($100,00 is 10% of $1 million). When buying a commercial or multi-family property, investors look at the NOI (Net Operating Income) of the property to determine the viability of their purchase and what the rate of return on their investment would be. I hope this answer helps you. Take care.
Jul 12, 2010