What Is Cap Rate and How Is It Calculated

Cap rate stands for capitalization rate and is use to determine the rate of return if you paid all cash for the property.

It is also used to value the property since similar properties in a geographic area are often priced or valued using the going cap rate.

In the example below, we have NOI (net operating income) of $125,786 divided by 8% (aka 8 cap rate) to get a projected sales price of $1,572,330.

Now if the cap rate was 7 or 7% the projected sales price would be over $200,000 more.

As an investor who is buying you want higher cap rates. The worst or both worlds is low cap rates and rising interest rates (assuming you are carrying debt on the property).