What Is The Definition Of Cap Rate, And Why Does It Matter?
In commercial real estate, cap rate, or capitalization rate, is used to determine the values of income producing properties such as apartments of five units or more, office buildings, strip malls and other such properties. The cap rate can represent extremely different things to different people in respect to their interests in commercial real estate. Before we investigate why cap rate matters, and what it means to specific people, let’s look at the actual equation and see how it works.
Cap rate has two main components which area: net operating income (NOI) and price or estimated value of the property. NOI is found by subtracting all expenses from the gross income of the property. When the NOI is divided by the price or value of a property, you are left with the cap rate.
You can move the components of cap rate around in order to determine each of the variables in the equation. The different equations used to determine any of the three variables are below:
NOI
Cap rate = ——–
Price
NOI
Price=...
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