what is meant by cap rate?

In Buying Property - Asked by Thomas L. - Apr 4, 2015

Mike N.
Broker/Agent
Holland, MI

Cap rate = net operating income/selling price. If acquiring property a desired cap rate can determine a purchase price if net operating is known.

Apr 4, 2015
David K.
Broker/Agent
Schaumburg, IL

There are two cap rates. The one Mike N. described below, is the empirical or observed cap rate.
The other cap rate is called the hypothetical, which is predicated upon the desire of investors to receive not only a "return on" their investment, but also a "return of" their investment.
Where the two cap rates differ speaks primarily to market timing.
You can read about cap rates in greater detail in a paper that I wrote on investment real estate math and theory, which I posted on my LinkedIn profile page. Here's a link to it...

Apr 7, 2015
Drew R.
Owner/Investor
Austin, TX

The initial rate of return an investment property is expected to generate. The Capitalization Rate is determined by dividing the property’s Net Operating Income (NOI) by the value of the property.
For example, a property which is expected to generate a first year NOI of \$100,000 and is valued at \$1,250,000 would have a cap rate of 8.0% (\$100,000 / \$1,250,000).

Oct 4, 2016