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What is a capitalization rate? 

The capitalization rate, also known as the “cap rate” is a fundamental concept that’s commonly used in commercial real estate. It refers to the return rate on an investment of a real estate property. It’s based on the income you expect the property to generate. This is a measurement that’s used to estimate the potential return of an investor. You can get this value using a cap rate formula:

Capitalization Rate = Net Operating Income / Current Market Value

How to calculate cap rate? 

One look at the formula, you will see that it’s quite easy to calculate the cap rate. A simpler explanation is that it’s the ratio between the property value and the net income. You can manually compute by following these steps:

  • Start by determining the value of your property. For instance, this can be the property’s selling price.

  • Then, determine the gross rental income of your property. This refers to how much money you would get from your tenants annually.

  • The next step is to determine your property’s vacancy rate. Then, decide the percentage of your operating expenses.

  • Before you make the final calculation, you should compute for the Net Operating Income using this formula:

            Net operating income = Gross operating income – operating expenses

  • Once you have all the values needed for the formula, you can start making your manual calculations to end up with the final cap rate.

 

Learn more at https://calculators.io/cap-rate/