Part 1 Calculating Cap Rate
- Calculate the yearly gross income of the investment property. The gross income of a piece of investment property will mainly be in terms of rent rolls.
- Subtract the operating expenses associated with the property from the gross income.
- Divide the net income by the property's purchase price.
Also, are high or low cap rates better?
The answer to this question depends on who is evaluating the property. Investors (buyers) want to have a high cap rate, meaning the value (or purchase price) of the property is low. Conversely, landlords (sellers) want to see a low cap rate because the selling price is high. Cap Rate Example (Which is a better deal?)
What is a good cap rate?
Professionals purchasing commercial properties, for example, may buy at a 4% cap rate in high demand areas, or a 10% (or even higher) cap rate in low-demand areas. Generally, 4% to 10% per year is a reasonable range to earn for your investment property. Continuing with our example from above, $17,000/ 5% = $340,000.
What is compression of cap rates?
“Jim, you just don't get it it's cap rate compression.” The cap rate, short for capitalization rate, is the return that a real estate investor will accept on an unleveraged purchase (no debt). Since 90% of investors use debt to make an acquisition, the cap rate is just a measure - a scoring system of sorts.