What is a Cap Rate in Commercial Real Estate?
[{"id": "dbxg7li", "text": "Cap rate is the annual return divided by total cost of purchase. \n\nEx: Investor buys $1,000,000 building. Rent (annual return) is $100,000 per year or $8,333 per month. $1,000,000/$100,000 = 10% Cap Rate ", "replies": [], "depth": 1}, {"id": "dbxn9n8", "text": "why do you ask, what does it pertain to? ", "replies": [], "depth": 1}, {"id": "dbxqkvg", "text": "Yup like dstu said, however not 100% correct. It is not your rent, it is your net operating income. So it would be your revenue after all expenses. Also A cap rate is a good measure on the risk of a property. A higher cap property is going to be a riskier investment (short term lease, poor real estate fundamentals, non credit tenant). \n\nMore risk, more reward (higher cap)", "replies": [], "depth": 1}, {"id": "dbxwxz1", "text": "If you know basic algebra and can remember IRV, you'll understand quite a bit about income producing property.  As long as you have two variables you can solve for the third.\n\nI = Income...this is NET OPERATING INCOME (NOI).  If you're a landlord and are paying heat and maintenance, Income would be (Rent minus Heat minus Maintenance).  Of course, this is simplified and does not include vacancy or reserves.  Simply put, it's the money you have left before paying your debt.  [Let's keep it easy and use $100,000.]\n\nR = Rate...or cap rate in this case.  [Let's use 8%]\n\nV = Value...or the purchase price.  [Purchase price is $1,250,000]\n\n----------------------------------------------------------------------------------\n\n--If we know purchase price and income.....$100,000 NOI / $1,250,000 = 8% cap rate\n\n--If we know purchase price and cap rate.....$1,250,000 x 8% = $100,000 NOI\n\n--If we know cap rate and NOI.....$100,000 / 8% = $1,250,000\n\nIn summary, it's the relationship between the net earnings of a property and the purchase price. \n\n", "replies": [], "depth": 1}]