Key TakeawaysCapitalization rate is calculated by dividing a property’s net operating income by the current market value.This ratio,expressed as a percentage,is an estimation for an investor’s potential return on a real estate investment.Cap rate is most useful as a comparison of relative value of similar real estate investments.
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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 a cap rate and how is it calculated?
That is, the cap rate is simply the required rate of return minus the growth rate. This can be used to assess the valuation of a property for a given rate of return expected by the investor. For instance, say the net operating income of a property is $50,000, and it is expected to rise by 2 percent annually.
What is capitalization rate in real estate?
Capitalization rate is calculated by dividing a property’s net operating income by the current market value. This ratio, expressed as a percentage, is an estimation for an investor’s potential return on a real estate investment.