Capitalization Rate = Net Operating Income / Purchase Price
Additionally, since property prices fluctuate widely, the first version using the current market price is a more accurate representation as compared to the second one which uses the fixed value original purchase price.
What is a good cap rate?
A good cap rate can be anything between 4%-12%. If you are in a location with high demand and high costs like New York City or Los Angeles 4% may be considered a good cap rate. A lower-demand area like an area that is developing or a rural neighborhood might see average cap rates of 10 percent or higher.
What does a cap rate of 7% mean?
It's basically a mathematical formula used to calculate the ROI (Rate of Return) you'd expect to receive from a property you plan to purchase. Calculation Example: If the current market value of a property is $1 million and has an NOI (Net Operating Income) of $70,000, then the cap rate is 7% or 1,000,000 ÷ 70,000 = 7.
What is a 4% cap rate?
For example, a property with a 4 percent cap rate will take four years to recover the investment. Overall, cap rate is an important way for investors to estimate the level of risk associated with a given property.
What does 5.5 cap rate mean?
A medium cap rate (5.5%–8%) is usually found in a lower-income area with average amenities, slightly higher crime rates, average school systems, older construction and typically B- or C-class properties.