Found 1 blog entry tagged as What Is the Cap Rate and Why Is It Important?.

Capitalization rate (also known as cap rate) is the rate of return on a commercial real estate investment.

While cap rate does not consider the impact of mortgage financing, a general rule of thumb is whether the cap rate is above or below the interest rate. If the cap rate is greater than the interest rate, you’ll generally come out ahead. If the cap rate is lower than the interest rate, you’ll be relying on appreciation for your return, making it a riskier speculative investment.

How to calculate cap rate

The formula for cap rate is simple: income, fewer expenses, divided by the purchase price.

On a long-term rental, multiply the monthly rental rate by the number of months per year you expect the property to be rented. In areas with…

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