EXPLANATION
Shows the rate at which future income is discounted in order to determine its present value.
“In layman’s terms, it shows the percentage of property value attributable to net operating income.”
“Net operating income is gross rental income less vacancy and operating expenses and is one of the most important components of any real estate analysis.”
EXAMPLE
You are about to take a listing on an apartment complex for $1,300,000 with a gross rental income of $200,600, 3% vacancy rate, and operating expenses of 42%. You want to see whether the cap rate is in line with prevailing cap rates in your market area.
“Operating expenses are computed as a percent of gross operating income for entries 1 – 100.”
“For best results, use annual amounts for all entries.”
Cap Rate
Solves the Capitalization