| What is a Cap Rate? |
A metric used to gauge the approximate risk and rate of return on an income-producing asset, assuming the investor paid cash. A cap rate is expressed as a percentage and derived by dividing the Net Operating Income (NOI) by the sales price or current market value.
Formula: Capitalization Rate = Net Operating Income / Current Market Value
Net Operating Income: $150,000
Current Market Value: $2,000,000
Net Operating Income ($150,000) / Sales Price ($2,000,000) = 7.5% Cap Rate
In short, this means that you would have an approximate return of 7.5% if you paid cash for the property.
You may ask, is this an effective way to value a property?
There are a handful of variables that are…