The Ultimate Guide to Cap Rate

Welcome to the Ultimate Guide to Cap Rate (also known as “capitalization rate”). In this guide, we will start by discussing what the basic definition of cap rate is and then move on to much more advanced topics related to cap rates.

Cap Rate = Net Operating Income ÷ Purchase Price

Cap rate is defined as the Net Operating Income (often abbreviated as NOI) divided by the Purchase Price. In The World’s Greatest Real Estate Deal Analysis Spreadsheet™ cap rate is calculated for you.

In future updates I will also be adding additional sections on:

  • Cap rate is the cash on cash return on investment when you own a property free and clear – cap rate ignores property financing
  • Allows you to compare properties without mudding the waters discussing financing – discuss pros and cons of this aspect
  • Walk through Net Operating Income calculation (and link to Net Operating Income page)
  • Using cap rate to determine property values for multi-family, apartments and commercial properties
  • Cap rate using purchase price versus cap rate using current property value
  • Cap rate charts from REFP for buying just one rental property
  • Cap rate charts from REFP for buying 10 rental properties
  • Cap rate charts from REFP for buying 10 Nomad™ properties
  • Cap rate charts from REFP when we have irregular appreciation rates (monte carlo)
  • Cap rate as a measure of risk – other ways to measure risk
  • Factors that impact cap rate
  • CBRE’s North American Cap Rate Report including a discussion of class of properties
  • Using cap rate to help optimize which properties to pay off (examples with REFP)
  • What’s a good cap rate for rental properties?
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