CAP Rate
The CAP Rate or “Capitalization Rate”. It’s a way to measure how good of an investment a real estate property is.
To put it simply, if you want to buy a house or a building and rent it out to people, you want to make sure you can make enough money to cover all the costs of owning that property, like paying for repairs and maintenance, property taxes, and so on.
The CAP rate tells you how much money you can expect to make from the property each year compared to how much you paid for it.
For example, if you bought a building for $100,000 and it makes you $10,000 each year in rental income, then your CAP rate would be 10%. Usually the NOI (Net Operating Income) is used to calculate the rental income used in this formula.
CAP Rate = NOI / Purchase Price
So, if someone tells you the CAP rate of a property is 8%, it means that for every $100,000 they spent on buying that property, they can expect to make $8,000 per year in rental income.