Cap Rate, short for Capitalization Rate, is a formula used to help determine the value of rental property. Investors will use the cap rate of a property to help determine a good or bad deal, since it is based on market values (recent sales of similar properties) in the area.
Cap Rate is determined by dividing the net operating income (NOI) by the sale price (SP). The result will give you a percentage, which is your cap rate. For instance, a duplex in buffalo bringing in $450 per month per side has a gross operating income of $10,800. After taxes and some minor repairs, it is determined that the NOI is $9,000. The property is listed at $65,000, but having a shrewd real estate agent, the final sale price is $60,000. Using our sample figures, we come to a Cap Rate of 15%.
