# what is cap rate

In Selling Property - Asked by Kathy G. - May 1, 2013

Steve H.
Broker/Agent
Burbank, CA

Capitalization Rate = Yearly Income/Total Value
A rate of return on a real estate investment property based on the expected income that the property will generate. Capitalization rate is used to estimate the investor's potential return on his or her investment. This is done by dividing the income the property will generate (after fixed costs and variable costs) by the total value of the property.

May 1, 2013
Trevor N.
Developer
Los Angeles, CA

Cap Rate = Net Operating Income (NOI) divided by Price.
NOI is the revenue of the building from rent minus the expenses, such as taxes, utilities, etc (but not including debt).
So the cap rate, which is expressed as a percentage, is the return on the deal. For example if you own a shopping center that gives you \$100,000 per year in profit from rent (NOI) and you sell it for \$1,000,0000, that reflects a 10% cap rate. The buyer is getting a 10% unleveraged return on their investment.

May 1, 2013
Chris G.
Broker/Agent
Kerrville, TX

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. The rate is calculated in a simple fashion as follows:
Cap Rate = Annual Net Operating Income (DIVIDED BY) Cost or value

May 21, 2013
Lee T.
Broker/Agent
Marina Del Rey, CA

How to determine a cap rate
Get the recent sold price of an income property, such as an apartment complex.
Example: Six unit apartment project sold for \$300,000
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
Divide the net operating income by the sale price to get cap rate.
Example: \$24,000 / \$300,000 = .08 or 8% (The Capitalization Rate)

Jul 11, 2013