what is real estate cap rate
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What is cap rate in commercial real estate?
Cap rate, or capitalization rate, is the ratio of a property net income to its purchase price. It an essential number for gauging a property rental income potential.
Is cap rate a good measure of a property value?
Although cap rate gives a good idea of a property theoretical return on investment, it should be used in conjunction with other metrics such as the gross rent multiplier, among many others. Therefore, other metrics should be used in conjunction with the capitalization rate to gauge the attractiveness of a real estate opportunity.
What is an example of a cap rate?
For example, a property with a 4 percent cap rate will take four years to recover the investment. Overall, cap rate is an important way for investors to estimate the level of risk associated with a given property. (Net Operating Income / Current Market Value) X 100 = Capitalization Rate
How does the cap rate affect your rental property?
I檒l also share examples of how to use the cap rate formula in a very practical way to analyze real estate markets and rental properties. With the cap rate as a tool in your rental property toolbox, you檒l be able to more confidently buy and profit from your own investment properties.