Introduction: Cap rates are the cornerstone of evaluating commercial property investments. But what do they really mean?
What is a Cap Rate? The capitalization rate (cap rate) measures a property’s net operating income (NOI) relative to its purchase price.
Formula: Cap Rate = NOI / Purchase Price
Why It Matters:
- Lower cap rates indicate lower risk and higher valuations.
- Higher cap rates signal higher risk but potentially stronger returns.
Practical Example: A property with $100,000 NOI priced at $1,000,000 has a 10% cap rate.
Takeaway: Understanding cap rates helps investors compare opportunities and align risk tolerance with goals.
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