Cap Rate (Capitalization Rate)
Determine property yield rate relative to acquisition price.
Capitalization Rate (Cap Rate)
The Cap Rate is the rate of return on a real estate investment property based on the income that the property is expected to generate.
Formula
Cap Rate = (Net Operating Income / Purchase Price) * 100
What this tells you
Cap Rate helps you compare the yield of different investment properties without taking financing structures into account. It tells you the expected rate of return if you purchased the property entirely with cash.
How to improve it
- Increase NOI: Optimize tenant lease terms to increase gross revenues.
- Acquire Below Market Value: Negotiate lower purchase prices to improve yield rates relative to cost.